How Do You Actually Value a Small Business?

By Joshua Ross

Do you know what your business is worth? When I was getting ready to sell mine, I didn't. I had a number in my head, but no real idea how I got there.

That's common. Most small business owners can tell you their revenue, their margins, maybe even their growth rate. But when it comes to value of their business, they are unclear, because it may be the only time they sell. The reality is there's no single formula, changes based on industry and variables. There are several methods, and the right one depends on your business.

Here are the most common approaches.

Seller's Discretionary Earnings (SDE)

This is generally the one most owner-operated small businesses use. You start with net profit, then add back the owner's salary and any personal expenses running through the business. That gives you SDE. A buyer then applies a multiple, typically between 2x and 4x, based on factors like industry, growth, recurring revenue, customer concentration and how dependent the business is on you. If you run the day-to-day, this is probably where your valuation starts.

EBITDA Multiple

If your business runs without you, buyers tend to look at EBITDA: earnings before interest, taxes, depreciation, and amortization. The key difference from SDE is that EBITDA does not add back owner compensation. Multiples here are usually higher, ranging from 3x to 6x, because a business that operates independently carries less risk for a buyer.

Market Comparables

This method looks at what similar businesses have actually sold for. Think of it like pricing a house by looking at recent sales in the neighborhood. It's useful as a reality check, but hard to rely on alone because no two businesses are identical and it is tough to find comps for private business — there is no Zillow for small business sales.

Asset-Based Valuation

This one adds up your tangible and intangible assets and subtracts liabilities. It works best for asset-heavy businesses or in cases where the business is being wound down. For most service or tech businesses, this approach usually understates the real value.

What matters most

No single method tells the whole story. In practice, the strongest valuations blend approaches: a market multiple (2x–4x) to anchor the business valuation, an income method to confirm cash flow supports it, and an asset review (not generally used with service businesses) to understand the floor.

Most people overlook how early this work should start. If you're thinking about selling in the next one to three years, understanding your valuation now gives you time to improve it. Clean financials, reduced owner dependency, and consistent earnings all move the number in your favor.