How to value a small business
Almost every small business valuation reduces to one sentence: normalised earnings multiplied by a multiple. The reason two advisers hand you numbers that differ by hundreds of thousands is that neither half is a fact — the earnings figure is rebuilt from the accounts, and the multiple is argued from comparable sales. This page works through how each half is built, and what moves the second one.
The three methods, and which one your buyer will use
There are three recognised approaches. For owner-operated businesses changing hands, the first accounts for the overwhelming majority of transactions; the other two are mostly used as cross-checks.
| Method | How it works | When it is used |
|---|---|---|
| Earnings multiple | Normalised annual earnings × a multiple drawn from comparable completed sales in the sector. | Most owner-operated sales. It is what a trade buyer, an individual buyer and a broker will all start from. |
| Asset-based | What the business owns minus what it owes. | Asset-heavy businesses, and as a floor: a trading business is rarely worth less than its net assets. It ignores trading performance entirely. |
| Discounted cash flow | Forecast future cash, discount it back to a present value. | Rare below the mid-market. It produces a confident-looking figure that rests entirely on a forecast, which is exactly what a buyer of a small business is least willing to accept. |
The practical consequence: if someone values your business without first rebuilding the earnings figure, they have skipped the part that matters.
Step one: the accounts are not the earnings
Small company accounts are usually prepared to be tax-efficient, not to show a buyer what the business earns. Nobody values the profit line as printed. It gets rebuilt, and the rebuild is called normalising.
Things that are typically added back, because a new owner would not incur them:
- Interest, tax, depreciation and amortisation — the four letters in EBITDA. They describe how the business is financed and taxed rather than whether the trading works.
- Genuine one-offs: a settled legal dispute, a rebrand, a relocation. One-off means it will not recur, not that it happened once.
- Owner benefits a buyer would not continue: a vehicle, personal travel, a family member on the payroll who does not work in the business.
Things that are typically deducted, because a buyer will genuinely pay them and the current owner does not:
- A market-rate salary for the owner's own role, if the buyer will have to hire someone to do it.
- Capital spending the business has deferred — equipment at the end of its life, a system that has to be replaced.
- Rent at market rate, where the premises are owned personally and charged to the business at something else.
Every add-back is a claim, and every claim gets tested in due diligence. An add-back you cannot evidence with an invoice is an add-back a buyer will remove.
Step two: pick the metric, because the multiple depends on it
Two normalised earnings figures are in common use, and they are not interchangeable.
- SDE — seller's discretionary earnings — adds one working owner's entire compensation back. It assumes the buyer will do the job themselves.
- EBITDA leaves a market-rate replacement salary in as a cost. It assumes the buyer will hire.
On one worked set of accounts the same business produces SDE of $226,000 and adjusted EBITDA of $161,000. The $65,000 gap is precisely the market salary of the owner's own role. Both figures are correct; they answer different questions.
This is why a multiple quoted without its metric is meaningless. "Three times" against SDE and "three times" against EBITDA are different prices for the same business. Always ask: three times what?
The full comparison, worked line by line.
Step three: what actually moves the multiple
Two businesses with identical earnings routinely sell for very different sums. The multiple carries the risk the buyer is taking on, and these are the factors that move it most.
| Pushes the multiple down | Pushes it up |
|---|---|
| The business depends on the owner personally | It runs without the owner, with documented processes |
| Revenue concentrated in one or two customers | A broad customer base, none of them critical |
| Income won afresh every month | Contracted or recurring income the buyer inherits |
| Accounts that do not reconcile to the bank | Clean records a stranger can verify quickly |
| Key contracts that cannot be assigned | Contracts, leases and systems that transfer cleanly |
| Declining or erratic revenue | A stable or growing trend over three years |
This page does not name a market multiple, deliberately. Multiples vary by sector, size, period and deal structure, and a number quoted without comparable evidence behind it is worse than no number at all. A broker or accountant with access to completed-sale data in your sector is the right source for that figure.
Why most of the price is decided before you sell
Every factor in the right-hand column above takes months to change, and none of them can be changed during a negotiation. By the time a business is on the market, the multiple it will achieve is largely already fixed.
That is the practical argument for treating valuation as something you do early — not to set an asking price, but to find out which of those rows currently describes you, while there is still time to move between them.
Arithmetic and general information only — not financial, tax, legal or investment advice. Your own figures, and your own accountant, decide what any of this means for you.
Do this sum for free
free business valuation calculator — put your own revenue, costs, owner pay and a fair market salary in and it normalises the earnings, applies a range of multiples and shows the resulting range. It runs in your browser and nothing you type is sent anywhere.
If you would rather not build it yourself
The Business Sale Readiness & Valuation toolkit ($499) is a full valuation model with a sensitivity table across multiples, a weighted readiness assessment across the ten areas buyers examine, a preparation checklist and an adviser prep summary. One-time purchase, instant download.
Frequently asked questions
What is the formula for valuing a small business?
Normalised earnings multiplied by a multiple. Normalised earnings are the accounts rebuilt to show what the business earns for a new owner, adding back interest, tax, depreciation, amortisation, genuine one-offs and owner benefits a buyer would not continue, and deducting costs a buyer will genuinely incur. The multiple comes from comparable completed sales in the sector.
Should I use SDE or EBITDA?
It depends on the buyer, not on you. An individual buying themselves a job will use SDE, because they are the replacement for the owner. A trade buyer or investor with management already in place will use EBITDA, because they will pay someone to do that role. A multiple is meaningless without knowing which metric it applies to.
Can I value my business myself?
You can build a defensible range yourself: normalising earnings is arithmetic, and the factors that move a multiple are observable. What you cannot do alone is source reliable comparable-sale data for your sector, which is what turns a range into a price. Use your own working to understand the business, and a broker or accountant for the comparables.
Why do two valuations of the same business differ so much?
Almost always because they used different earnings figures, different add-backs, or different metrics. A valuation is only comparable to another if you know which earnings figure it multiplied and what was added back to get there.
How long before selling should I start?
The factors that move the multiple — owner dependence, customer concentration, documented processes, clean records, assignable contracts — take months to change and cannot be changed during a negotiation. A year or two is a realistic runway if the aim is to move the multiple rather than simply discover it.
Sources
- Instilus: SDE vs EBITDA, both formulas on one set of accounts — checked 2026-09-24
- Instilus: free business valuation calculator — checked 2026-09-24