top of page
Search

How to Value a Small Business: A Complete Step-by-Step Guide

  • Writer: Robert Hulet, CBA, CVA
    Robert Hulet, CBA, CVA
  • May 10
  • 3 min read

How to Value a Small Business - Complete Step-by-Step Guide

Introduction: A Guide to Why Business Valuation Matters


Whether you are planning to sell your business, bring on investors, or simply track growth, knowing how to value a small business is essential. A proper valuation helps you set a fair price, make strategic decisions, and understand your company’s financial health. In this guide, we will walk you through each step of the small business valuation process using proven methods and real-world examples.


When to Perform a Valuation


Performing a business valuation is not just for exit planning. You should consider valuing your business:


  • Before selling or merging

  • During partner buy-ins or buy-outs

  • When applying for a loan or line of credit

  • For tax or estate planning

  • Annually, to benchmark business growth


Knowing your company’s worth empowers you to make smarter financial and strategic decisions.


Step 1: Gather Financial Statements


Start with organized and up-to-date financials. These are the foundation of your business valuation. Be sure to collect:


  • Profit & Loss (P&L) Statements (last 3 years)

  • Balance Sheets

  • Cash Flow Statements

  • Tax Returns


Having clean financial documents boosts credibility and ensures a more accurate valuation.


Step 2: Normalize Earnings


Next, adjust your financials to reflect the true earning potential of your business. This process is called normalizing earnings or calculating Seller’s Discretionary Earnings (SDE).


Common adjustments include:


  • Owner's salary and personal expenses

  • One-time costs (e.g., legal fees)

  • Non-essential employee compensation

  • Non-cash expenses like depreciation


Normalized earnings give potential buyers a clearer picture of real profit.


Step 3: Choose the Right Valuation Method


Selecting the right valuation approach depends on your business model, industry, and financials.


Income-Based Approach


  • Discounted Cash Flow (DCF): Projects future cash flow and discounts it to present value.

  • Capitalization of Earnings: Divides earnings by a capitalization rate.


Market-Based Approach


  • Uses comparables (comps) to evaluate similar businesses that have sold.

  • Common in broker-led (broker opinion) valuations.


Asset-Based Approach


  • Best for asset-heavy businesses (e.g., manufacturers).

  • Calculates value by subtracting liabilities from total tangible and intangible assets.


Step 4: Apply Multiples (SDE/EBITDA)


Most small businesses are valued using a multiple of SDE or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).


Typical multiples range:


  • SDE: 1.5x to 3x (this will vary per industry)

  • EBITDA: 4x to 6x (for larger businesses)


Factors that influence your multiple:


  • Industry and market conditions

  • Revenue growth and profitability

  • Customer concentration

  • Owner dependence


Step 5: Factor in Intangibles (Brand, IP, Customer Base)


A business is not just numbers. You should also factor in:


  • Brand reputation and recognition

  • Customer loyalty and retention

  • Online presence and SEO rankings

  • Intellectual property (e.g., patents, trademarks)

  • Systems and processes


These can significantly increase your business’s perceived value.


Tools and Calculators


Use online valuation calculators to get a quick estimate. While not as accurate as a professional valuation, they provide a good starting point.


Popular tools include:


  • BizEx Business Valuation Tool

  • CalcXML Business Valuation Calculator

  • ExitAdviser’s Valuation Tool


Always use these alongside expert input and clean financials.


Common Pitfalls to Avoid:


  • Using outdated or inaccurate financials

  • Overestimating intangibles without evidence

  • Failing to normalize earnings

  • Relying solely on free calculators

  • Ignoring market trends and comps



Avoid these mistakes to ensure your valuation is credible and defensible.

Knowing how to value a small business empowers you to make informed decisions and maximize your company’s worth. Whether you are preparing for a sale, seeking investors, or just tracking growth, this step-by-step guide is your roadmap.


 
 
 

Comentarios


Copyright © 2015-2024 by Business Valuation Solutions - Pacific Grove, CA - Monterey County

Business Valuation Solutions is a d.b.a under Private Client Services of California, LLC

  • Facebook
  • Twitter
bottom of page