Business Valuation Basics
Small businesses aren't valued the way public companies are. Here's the method most commonly used in practice, and why it works the way it does.
SDE, not revenue
Revenue tells you almost nothing about what a business is worth — a $2M-revenue business with thin margins can be worth less than a $500K-revenue business that's highly profitable. Small businesses are typically valued off of Seller's Discretionary Earnings (SDE): the business's profit, plus the owner's salary and benefits, plus one-time or personal expenses run through the business. SDE represents the total financial benefit a single owner-operator gets from the business each year.
The multiple
Most small businesses sell for somewhere between 1.5x and 4x annual SDE, depending on industry, growth trends, how dependent the business is on the current owner, and how much of the purchase price the seller is willing to finance. A business that runs well without the owner physically present every day commands a higher multiple than one that is entirely dependent on the owner's personal relationships or skills.
Businesses with real estate, heavy equipment, or larger recurring revenue may instead be valued off EBITDA (earnings before interest, taxes, depreciation, and amortization) at somewhat higher multiples, since EBITDA valuations are more common for businesses large enough to support a management team beyond the owner.
What moves the multiple
- Consistent or growing revenue over the last 2-3 years (vs. declining or erratic)
- Diversified customer base (no single customer is a large share of revenue)
- Documented processes that don't depend entirely on the owner
- Clean, well-organized financial records (see our guide on preparing financials)
- Favorable lease terms or included real estate
- Industry growth trends and local competition
This is a starting point, not an appraisal
Multiple-based estimates are a useful sanity check, not a substitute for a formal valuation. Our AI-assisted valuation tool (available to sellers once you list a business) uses this same multiple-based approach to give you a quick estimate — always clearly marked as an estimate, not a certified appraisal. For a sale of any real size, a qualified business appraiser or M&A advisor can account for factors a simple multiple can't.