What Is My Business Worth? Understanding Business Valuation Methods

Why the Number in Your Head Is Rarely the Number Buyers Use

Owners typically have a number in their heads about what their business is worth, but that number is rarely based on the same framework a buyer would use. Buyers evaluate profitability, risk, and transferability, and the valuation method they use depends on the size of the deal among other factors. A spread between what an owner expects and what the market will bear is common. Shrinking that gap gets easier once you understand how buyers are actually calculating their numbers.

In short: the method, not the effort behind your business, sets the framework for your number.

How Business Size Changes the Valuation Method

The method used to value your business isn’t one-size-fits-all. It shifts based on the size of the transaction, and knowing which method applies to your business is the starting point.

SDE: The Standard Below $2 Million

Seller’s Discretionary Earnings (SDE) is the primary valuation method for owner-operated businesses transacting below $2 million in purchase price. A multiple is the number applied to your SDE to arrive at a sale price. A business with $300,000 in SDE selling at a 2.5x multiple would be priced at $750,000. If you haven’t dug into how SDE is calculated yet, that’s the right place to start. See our post Valuation 101: The Importance of Seller’s Discretionary Earnings.

EBITDA: The Standard Above $2 Million

Above the $2M threshold, buyers shift to EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, sometimes called recast EBITDA once normalized for add-backs. The distinction matters because the two methods measure different things, and using the wrong one to estimate your own value will either inflate your expectations or leave money on the table.

• SDE adds back the owner’s full compensation because the buyer is stepping into that role.
• EBITDA treats owner salary as a normal operating expense, reflecting that larger businesses require professional management that stays in place after the sale.
• The shift typically happens between $1M and $2M in purchase price depending on how the business is structured.

EBITDA multiples appear higher than SDE multiples for the same business, and that’s expected, because EBITDA is a smaller number.

In short: the metric changes with deal size, but the goal is the same, an accurate read on transferable cash flow.

What Are Market Comps and How Do Buyers Use Them?

Market comparables are sale prices from similar businesses in the same industry, and buyers use them as a reference point, not a price tag. Two businesses in the same sector can sell at very different multiples based on customer concentration, recurring revenue, owner dependency, and the quality of their financials. A comp tells you what the market has paid for businesses broadly similar to yours. It doesn’t tell you where your business lands within that range. Professional brokers use comps alongside a full financial analysis, and understanding the difference between the two is what separates a realistic asking price from one that stalls a deal.

In short: comps tell you the neighborhood. Your financials tell you the address.

What Actually Moves Your Multiple Up or Down?

According to BizBuySell transaction data, average earnings multiples for small businesses range from 2x to 3.3x across popular sectors, with an overall average of 2.57x. The difference between a 2.0x and a 3.0x multiple on $300,000 in SDE is $300,000 in sale price, and the majority of what drives that spread is within your control.

Factors that increase your multiple:

• Recurring or contracted revenue
• A management team that operates without daily owner involvement
• Clean, well-organized financial statements, ideally CPA-prepared
• Diversified customer base with no single client above 15 to 20% of revenue
• Documented operating procedures and systems
• Consistent or growing earnings over the past two to three years

Factors that compress your multiple:

• Declining margins in the most recent year
• Deferred maintenance, aging equipment, or pending legal exposure
• Financials with extraordinary personal expenses included and/or unorganized

A Realistic Look at How This Plays Out

An Idaho HVAC service business carries $425,000 in annual SDE. The owner expects to sell for around $2 million, roughly a 4.7x multiple, well above the typical range for a business of this type.

When an advisor reviews the business, here’s what they find:

• The owner handles all major customer relationships and is the primary technician on complex jobs
• Two customers account for nearly 40% of revenue
• Financial statements are internally prepared with a mix of personal and business expenses
• There are no documented standard operating procedures
• Revenue has grown, but margins have compressed over the past two years

Given those factors, the business would likely price in the 2.5x to 3.0x range, translating to $1.06M to $1.27M. None of those issues are permanent. The earlier you understand where you stand, the more time you have to act.

When Is It Time to Get a Formal Valuation?

A professional valuation isn’t only for owners preparing to sell next year. Consider getting one if:

• You’ve never had a formal assessment of your business’s market value
• You’re beginning to think about an exit, even if it’s two to five years out
• You’re considering bringing on a partner, investor, or key employee with equity
• Your business has grown significantly and your last estimate is more than two years old
• You want a baseline to measure improvement against

A professional valuation isn’t an expense. It’s the foundation of every good exit decision that follows.

The method, the multiple, and the final number all depend on the size, industry and trends of your business, market conditions, and what a buyer will find when they start asking questions.