How to Value a Business Before You Buy or Sell

Ask five people what a business is worth and you will get five confident, incompatible answers. The good news: for small and mid-sized private companies, valuation is less mysterious than it looks. Almost every credible number comes from the same skeleton — a measure of earnings, multiplied by a market-derived factor, adjusted for what actually transfers to the buyer.

Start with the right earnings figure

For owner-operated businesses, the standard is seller's discretionary earnings (SDE): pre-tax profit, plus the owner's salary and benefits, plus interest and depreciation, plus genuinely one-off expenses. SDE answers the question a buyer is really asking — “how much cash does this business put in the hands of one working owner?”

Larger companies with a management team in place are valued on EBITDA instead, because the buyer must pay a manager to do what the owner did. The same business can have an SDE of $500K and an EBITDA of $350K; using the wrong basis with the right multiple produces a confidently wrong price.

Apply a defensible multiple

Multiples come from comparable transactions, and they vary enormously by industry. As broad orientation:

• Restaurants and retail typically trade at 1.5–2.5× SDE.
• Home services and trades with recurring contracts reach 2.5–3.5×.
• Medical, dental and veterinary practices often command 60–80% of collections, or 4–6× EBITDA for larger groups.
• Niche manufacturers with certifications and backlog can exceed 4–5× EBITDA.

Within a range, quality decides the position: revenue trend, customer concentration, staff tenure, lease security and how dependent the business is on its owner. A shop where the owner is the chief technician, salesperson and bookkeeper deserves the bottom of the range, whatever the tax return says.

Adjust for what transfers

Inventory at cost, equipment condition, assumable contracts and transferable licenses all move the final figure — as does anything that does not transfer, like a personal relationship that walks out the door with the seller. Real estate is always valued separately from the operating business.

Sanity-check both directions

Sellers should test the asking price against a buyer's reality: after debt service on an acquisition loan, does the cash flow still pay a market salary and leave margin for surprises? Buyers should reverse the test: if the answer is comfortably yes, the price is probably fair even if the multiple sounds high. Our free valuation tool applies category-specific multiples to your numbers and is a sensible first step — before the conversation with your accountant that should always come next.