How to Value a Small Business (2026)
The most reliable way to value a small business is the SDE (Seller's Discretionary Earnings) multiple method. Calculate SDE by adding net profit + owner salary + owner benefits + one-time expenses. Then multiply by an industry-specific multiple — typically 2–4× for main street businesses. A profitable service business earning $200,000 SDE at a 3× multiple is worth roughly $600,000. Larger deals (over $1M EBITDA) use EBITDA multiples instead. For asset-heavy or distressed businesses, the asset-based method applies. SBA lenders require a 1.25× minimum debt service coverage ratio and a formal appraisal for loans over $250,000.
Why Valuation Matters — for Buyers and Sellers
Whether you're buying your first business or preparing to exit one you've built, the asking price is either an anchor or a trap. Sellers overvalue because they count sweat equity. Buyers undervalue to negotiate harder. Neither helps you close a deal that works for both sides.
Understanding the five core valuation methods — SDE multiples, EBITDA multiples, asset-based valuation, market comparables, and Discounted Cash Flow (DCF) — gives you the vocabulary to negotiate confidently and the math to know when a deal is fairly priced.
Method 1: SDE Multiples (Most Common for Small Businesses)
SDE stands for Seller's Discretionary Earnings. It's the industry-standard measure of a small business's true earning power for an owner-operator.
How to Calculate SDE
Start with the business's net profit (after all operating expenses, before taxes), then add back:
- Owner's salary and benefits (wages, health insurance, retirement contributions)
- Depreciation and amortization (non-cash charges)
- Technology and SaaS subscriptions — solopreneurs spend $4,200–$7,800/yr on average (software, hosting, tools, AI services). These are real operating expenses that affect SDE.
- Interest expense (financing structure will change with the sale)
- One-time, non-recurring expenses (legal fees for a lawsuit, equipment write-offs)
- Personal expenses run through the business (personal vehicle, travel, etc.)
SDE = Net Profit + Owner Compensation + Addbacks
Worked Example
SDE Multiple Ranges by Business Type
The multiple applied to SDE depends on industry, growth rate, owner dependence, and deal size. Here are current market ranges:
| Industry | SDE Multiple Range | Key Factors |
|---|---|---|
| Restaurant (Full Service) | 1.5× – 3.0× | Location, lease terms, cuisine type |
| Fast Food / QSR Franchise | 2.5× – 4.0× | Brand strength, franchise agreement terms |
| Retail (Brick & Mortar) | 1.5× – 2.5× | Inventory value, lease, online presence |
| eCommerce / Online Retail | 2.0× – 4.0× | Traffic source, brand moat, supplier concentration |
| Professional Services | 2.5× – 4.0× | Client concentration, staff retention, contracts |
| Home Services (HVAC, plumbing) | 2.5× – 4.5× | Recurring contracts, technician count, territory |
| Healthcare / Dental | 3.0× – 5.0× | Insurance mix, patient retention, equipment |
| Construction / Contracting | 1.5× – 3.0× | Backlog, equipment owned, bonding capacity |
| B2B SaaS / Subscription | 4.0× – 8.0× | MRR, churn, growth rate, product differentiation |
| Agency (Marketing/PR/Design) | 2.5× – 4.5× | Recurring retainers, client mix, key-person risk |
Method 2: EBITDA Multiples (For Larger Deals)
Once a business generates over $1 million in annual earnings, buyers and lenders shift to EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. Unlike SDE, EBITDA doesn't add back the owner's salary, which makes it better suited for businesses with professional management already in place.
EBITDA multiples for small-to-mid market deals typically range from 3× to 7×, with strategic buyers paying premium multiples for synergies. The formula is straightforward:
Business Value = EBITDA × Multiple
A manufacturing company with $800,000 EBITDA trading at a 4× multiple has a $3.2M enterprise value. Subtract any outstanding debt and add cash to get equity value.
SDE vs. EBITDA: When to Use Each
| Factor | SDE Multiple | EBITDA Multiple |
|---|---|---|
| Business size | Under $5M revenue | $5M+ revenue |
| Management structure | Owner-operated | Management team in place |
| Earnings threshold | Under $1M annual earnings | Over $1M annual earnings |
| SBA financing | Common | Less common (conventional debt) |
| Owner's comp treatment | Added back to earnings | Counted as expense (market rate) |
| Buyer type | Individual buyers, searchers | Private equity, strategic buyers |
Method 3: Asset-Based Valuation
Asset-based valuation is used when the business isn't profitable or when assets are the primary value driver — think equipment-heavy companies, real estate holdings, or businesses being wound down. The calculation is:
Business Value = Fair Market Value of Assets − Liabilities
Assets typically include: equipment and machinery, inventory, accounts receivable, real estate (if owned), intellectual property, and goodwill. This method gives a floor value — what you'd get if you liquidated everything — not a going-concern value. Most operating businesses are worth more than their assets.
Method 4: Market Comparables (Real Deal Data)
While multiples give you a formula, market comparables give you a reality check. This method finds 3–5 businesses similar to yours that have actually sold recently, then adjusts for differences in size, revenue, profitability, geography, and business model.
The key sources are BizBuySell.com (700,000+ listings, sold database), MicroAcquire (SaaS and digital businesses), and Dealwake (transaction database with multiples). Business brokers also maintain private databases of closed deals.
How to Use Market Comparables
For each comparable sale, record: sale price, annual revenue, annual SDE (or EBITDA if available), location, and business type. Then calculate the implied SDE multiple and revenue multiple for each deal.
When you can't find perfect comparables, use the "rule of three": find one business larger than yours, one similar, and one smaller. The implied multiples from those three deals tell you the market range. Market comparables are particularly valuable when you're in a niche vertical where industry average multiples don't apply.
What Adjusts the Multiple Up or Down
Multiples aren't fixed. Buyers (and lenders) apply adjustments based on risk factors:
Multiple Compressors (lower value)
- High owner dependence — business stops if the owner leaves
- Customer concentration — one client represents 30%+ of revenue
- Declining revenue — 2+ years of revenue decline
- Weak books — messy financials, cash transactions, no accrual accounting
- Short lease — less than 3 years remaining on a key location lease
- Staff turnover — high churn in key roles
Multiple Expanders (higher value)
- Recurring revenue — subscriptions, retainers, service contracts
- Documented processes — SOPs, training manuals, CRM data
- Growth trajectory — consistent 15–20%+ year-over-year growth
- Diversified customer base — no client over 10% of revenue
- Strong brand / online presence — reviews, domain authority, social following
- Experienced management team — key people who stay post-sale
Revenue Multiples: A Quick Proxy
Revenue multiples are a fast sanity check, especially for early-stage or high-growth businesses where profitability doesn't yet reflect potential. They're common in SaaS and subscription models:
| Business Type | Revenue Multiple Range | When Used |
|---|---|---|
| SaaS (bootstrapped, $500K–$5M ARR) | 2× – 5× ARR | Profitable or near-profitable |
| eCommerce | 0.5× – 2× revenue | Combined with SDE check |
| Content / Media / Newsletters | 1× – 3× revenue | Subscriber monetization potential |
| Professional Services | 0.5× – 1.2× revenue | Sanity check alongside SDE |
| Brick-and-mortar Retail | 0.2× – 0.5× revenue | Low-margin environments |
Never rely on revenue multiples alone. A $2M revenue business with $50,000 net profit and a revenue multiple of 1× is priced at $2M — but its SDE multiple would be astronomical and the deal wouldn't pencil for any rational buyer.
Method 5: Discounted Cash Flow (DCF)
DCF is the most rigorous valuation method — and the most commonly misused on main street deals. It projects future cash flows over 3–5 years, estimates a terminal value at the end of that period, then discounts everything back to today's dollars using a discount rate.
Business Value = PV of Year 1 CF + PV of Year 2 CF + ... + PV of Year N CF + Terminal Value PV
When DCF Makes Sense
DCF is most appropriate when: the business has predictable, recurring cash flows (SaaS with multi-year contracts, established service businesses with long-term retainer clients), you have 3+ years of clean financial history, and you're modeling a 3–5 year hold period before resale.
The Discount Rate
Small business DCF typically uses a discount rate of 12–20%, reflecting: the risk-free rate (US Treasury yields), a premium for small business size and illiquidity, and a risk premium for industry-specific factors. More predictable businesses (recurring revenue, contracts in place) use lower rates; volatile or owner-dependent businesses use higher rates.
When NOT to Use DCF
For the vast majority of main street businesses — single-location service companies, restaurants, retail shops — DCF is unreliable because cash flow projections are too speculative. If the business could be worth $300K or $600K depending on whether the owner stays, your DCF is a guess dressed up as math. Use the SDE multiple method instead, and reserve DCF for businesses with multi-year contracts, recurring subscription models, or formal management teams where cash flow is genuinely predictable.
How SBA Lenders Think About Value
If you plan to use SBA financing to buy, lenders add a layer beyond the purchase price. They require the business to support the debt — measured by Debt Service Coverage Ratio (DSCR):
DSCR = Annual Net Operating Income ÷ Annual Debt Service
SBA requires a minimum 1.25× DSCR. That means for every $1 of annual loan payment, the business must generate $1.25 in operating income. For acquisitions over $250,000, SBA also requires a formal business valuation from a qualified independent valuator. Our SBA 7(a) Loans for Acquisitions guide covers eligibility and application step by step.
Get Your Free Business Valuation Estimate
Input revenue, profit, owner salary, and industry. Get a valuation range (conservative, mid-market, optimistic) plus a methodology explanation — in under 60 seconds.
→ Try the Valuation EstimatorCommon Valuation Mistakes
- Ignoring addbacks — Not normalizing personal expenses or one-time costs understates SDE significantly.
- Using one year of earnings — Lenders and sophisticated buyers average 2–3 years of financials. One outlier year (good or bad) gets averaged out.
- Confusing revenue with value — "We do $3M in revenue" isn't a valuation. Margins matter far more than topline.
- Overlooking working capital — Most acquisition deals include a working capital peg. Understand what current assets and liabilities will transfer.
- Not accounting for real estate — If the business owns its building, real estate is often carved out and valued separately.
When to Get a Formal Appraisal
A formal certified business valuation is required when: (1) applying for SBA financing over $250K, (2) settling a business dispute or divorce, (3) estate planning or gifting business interests, or (4) issuing equity to employees. Certified Valuation Analysts (CVA) and Accredited Senior Appraisers (ASA) typically charge $3,000–$10,000. For a quick deal sense check, our free tool is a solid starting point.