Business valuation

Four independent methods, reconciled into one defensible range — then adjusted for the things that actually move a business inside its band.

The business

Live
Earnings
$
$
$
Subtracted from SDE to derive EBITDA — what it costs to replace the owner.
$
Sets the asset floor — a business is rarely worth less than its saleable assets.
Value drivers
These place the business inside its industry band. Strong drivers earn the top of the range; weak ones cap it at the bottom.
40%
18%
35%
3%
Discounted cash flow
22%
Small private businesses are usually discounted at 18–30% to reflect illiquidity and key-person risk.
2%
Compare
$

Estimated value

Most likely value
—
—
Defensible range—
Value-driver position—
Asset floor—

Four approaches

Weighted into the conclusion
MethodBasisMultiple / rateIndicated valueWeight

What is moving the multiple

SDE to EBITDA bridge

Which basis applies to you
Seller's discretionary earnings—
Less market-rate manager salary—
EBITDA—
SDE margin on revenue—
Sector median margin—
Model this as a deal See all industry multiples
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How small businesses are actually valued

There is no single correct value for a private business — there is a range, and a negotiation inside it. Professional appraisers run several independent methods and reconcile them, because each one is wrong in a different direction. A multiple of earnings ignores the capital required to produce them. A discounted cash flow is only as good as its assumptions. An asset value ignores the earnings entirely. Together they triangulate.

Method 1 — SDE multiple

The dominant method for owner-operated businesses. Seller's Discretionary Earnings is net profit plus the owner's salary, personal expenses, interest, depreciation and genuine one-time costs. Main-street businesses generally trade between 2× and 4× SDE, with the sector setting the band and the value drivers setting the position inside it.

Value = SDE × Sector multiple (adjusted for value drivers)

Method 2 — EBITDA multiple

Once a business is large enough to employ a real manager, buyers switch to EBITDA, which subtracts a market-rate salary for that role. The same business will show a lower EBITDA than SDE and carry a higher multiple — the two are not comparable, and confusing them is the most common valuation error made by first-time sellers.

EBITDA = SDE − Market-rate manager salary

Method 3 — Revenue multiple

A sanity check rather than a primary method. It is useful when earnings are distorted by a single bad year, an aggressive owner compensation policy, or heavy reinvestment. Used alone it is dangerous, because it says nothing about whether the revenue is profitable.

Method 4 — Discounted cash flow

Projects cash flows forward and discounts them to today at a rate reflecting risk. Small private businesses warrant discount rates of 18–30% — far above public market rates — because they are illiquid, concentrated, and often depend on one person. DCF is the most theoretically sound method and the easiest to manipulate, which is why it is weighted lightly here.

What moves a business up its band

  • Recurring revenue — contracts and subscriptions are worth materially more than project work
  • Customer diversification — no client above roughly 10% of revenue
  • Owner independence — the business runs without the owner in it daily
  • Documented growth — three years of verifiable upward trend
  • Clean books — tax returns that match the internal financials
  • Tenure — a long operating history through at least one downturn

The gap between the bottom and top of a band is frequently 60% or more of the purchase price. For a seller, closing that gap is worth more than any amount of negotiating.

Why is my business worth less than I expected?
The three most common reasons are owner dependence, customer concentration, and add-backs that will not survive a buyer's quality-of-earnings review. A business that cannot operate without you is buying you a job, not an asset, and buyers price it accordingly.
Do I include inventory and equipment in the price?
Usually yes for equipment, since it produces the earnings being valued. Inventory is often handled separately at cost at closing. Say which convention you are using — a price that excludes inventory looks lower than one that includes it for the same business.
Does real estate change the multiple?
Real estate is valued and financed separately from the operating business. Keep them apart, or you will distort both the multiple and the loan structure.
Is this a formal appraisal?
No. This is a planning estimate. A certified valuation for litigation, estate, or SBA purposes requires an accredited appraiser working from verified financial statements.

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Estimates for educational purposes only, not a certified appraisal and not financial, tax, or legal advice.