Ask three people what your business is worth and you will get four answers. That is not because valuation is magic — it is because a business is worth what a buyer can confidently take out of it, and confidence varies. This guide explains the handful of ideas that drive every serious small-business valuation, in plain English.
Start with SDE: what the owner actually takes home
For owner-operated businesses — the machine shop, the dental practice, the HVAC company — the key number is Seller's Discretionary Earnings (SDE). It is the total financial benefit one full-time owner gets from the business in a year:
SDE = net profit + your salary + personal expenses run through the business + depreciation and other non-cash charges + one-time costs that won't repeat.
If your books show $180,000 of profit, you pay yourself $120,000, the truck lease is personal, and you replaced the roof once, your SDE might be $340,000. SDE is the number most Main Street buyers multiply.
EBITDA: the bigger-company yardstick
Once a business is large enough to hire professional management (a rule of thumb is somewhere above $5 million of revenue), buyers stop assuming they will work in it themselves. They use EBITDA — earnings before interest, taxes, depreciation and amortization — which is roughly profit with financing and accounting noise stripped out, and crucially after paying a real manager's salary. Same business, two lenses: SDE assumes the buyer works in it; EBITDA assumes they don't.
Multiples: what the market pays per dollar of earnings
Most small businesses sell for about 1.5 to 3.5 times SDE. Larger, manager-run businesses go for roughly 3 to 6 times EBITDA. Where you land in the range depends on:
- Industry. A managed IT services firm with monthly contracts commands a higher multiple than a restaurant, whose risks are legendary. Recurring revenue is the single biggest multiplier.
- Stability. Ten years of steady earnings beats three wild ones, every time.
- Transferability. If customers buy because of you personally, the multiple falls. If they buy from the company, it rises.
- Concentration. One customer at 40% of revenue is a discount, not a strength.
Discounted cash flow: the cautious buyer's check
Financially trained buyers cross-check multiples with a discounted cash flow (DCF) analysis: project the business's cash for the next five years, add a value for everything after that, and shrink it all back to today's dollars using a rate that reflects risk — for small private businesses, commonly 11–15%. A growing business looks better under DCF than a flat one, which is why growth matters even when this year's profit is modest.
Assets set the floor
If your company owns trucks, machines or inventory worth more than the earnings would suggest, the asset value (assets minus debts, adjusted for what they'd really sell for) becomes the floor price. For asset-heavy businesses — trucking, some manufacturing — the floor can exceed the earnings multiple entirely.
Why honest valuations come as a range
Beware anyone who tells you your business is worth exactly $1,247,000. Real valuations are ranges, because each method says something slightly different and the market moves. On Succession Marketplace every listing shows an independent range next to the asking price, built from all four methods above, with the math visible. You can run the same engine on your own numbers right now with our free valuation calculator — nothing you enter leaves your browser. And if you're curious what owners in your industry actually ask, browse current listings by industry.
One last thing
Valuation sets the conversation; preparation sets the price. The owners who get the top of the range are the ones whose books are clean, whose customers are spread out, and whose business demonstrably runs without them. Those are fixable — and they are worth fixing before you sell, not after. When the time comes, you can list your business anonymously and let the market tell you the rest.