Owners often start with revenue when they think about value. Buyers start somewhere else: how much the business earns, and how confident they can be that it will keep earning that after you leave.
The three common approaches
- Earnings multiple. The most common method for small businesses. Take a measure of earnings and multiply it by a number that reflects risk and growth.
- Asset-based. What the equipment, inventory, and other assets are worth. This usually sets a floor, and matters most for asset-heavy or less profitable businesses.
- Comparable sales. What similar businesses sold for. Useful as a check, though private sale data is limited.
Which earnings number?
Smaller, owner-operated businesses are usually valued on seller's discretionary earnings (SDE), which adds the owner's salary and personal or one-time expenses back to profit. Larger businesses, where a hired manager would run things, are usually valued on EBITDA, which assumes a market salary for that manager.
What moves the multiple
Two businesses with the same earnings can sell for very different prices. Buyers pay more when:
- The business runs without the owner day to day
- No single customer is a large share of revenue
- Revenue is recurring or under contract
- Earnings are steady or growing
- Books are clean and processes are documented
- The lease or real estate situation is secure
They pay less when any of these are missing, because they're taking on more risk.
Why online calculators miss
Quick calculators apply an average multiple to a number you type in. They can't see your add-backs, your customer mix, or how much rests on you, which is exactly what moves the price. Use them for a rough idea, then get a real valuation before making decisions.
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This article is general information, not legal, tax, or financial advice.