How to Value a Small Business Before Selling

Why You Must Know Your Business’s Value Before You Sell

Selling your small business may be one of the most important financial decisions of your life. Whether you're retiring, moving on to a new venture, or simply ready to cash out, knowing how to value a small business before selling is absolutely essential. Yet many owners guess their business’s worth — or rely on rules of thumb that don’t reflect reality. That’s a big mistake. Getting a proper business valuation before selling not only helps you set the right asking price but also improves your odds of closing a successful sale with the right buyer at the right terms.

Key Factors That Impact Your Business’s Value

When determining your business's worth, several variables come into play. Here are the most important:

• Revenue & Profit Trends

  Buyers look at more than just how much money you're bringing in. They want consistent, predictable profits — ideally with year-over-year growth.

  
  

• Seller’s Discretionary Earnings (SDE)

  For most small businesses, SDE is the key earnings metric. It includes your salary, net profit, interest, depreciation, and any perks, benefits, or discretionary expenses you run through the business.

  
  

• Industry & Market Conditions

  Some industries attract higher multiples due to their scalability, recurring revenue, or strong buyer demand.

  
  

• Customer Base & Contracts

  A diverse, loyal customer base with repeat business or long-term contracts adds value — and reduces perceived risk.

  
  

• Operational Systems & Team

  A business that runs well without the owner involved is far more attractive (and valuable) than one that depends heavily on you.

Most Common Valuation Methods Used When Selling a Business

There’s no one-size-fits-all formula, but most small businesses are valued using one of these three methods:

1. SDE Multiples and Revenue Multiples

This is the most common method used for owner-operated businesses under $5 million in revenue. You calculate your SDE and apply a multiple based on risk, industry, size, and growth potential.

2. EBITDA Multiples

For larger businesses or those with strong management teams, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is used. Multiples here tend to be higher than SDE multiples.

4. Capitalization of Earnings

This method estimates the value based on the company’s expected future earnings. It involves taking a representative level of annual earnings (often net income or net cash flows) and dividing it by a capitalization rate that reflects the business’s risk and expected return. This method is best suited for stable, mature businesses with predictable income.

3. Asset-Based Valuation

Used primarily for asset-heavy businesses like manufacturers, repair shops, or auto dismantlers. The value is based on the tangible assets (equipment, inventory, etc.) minus liabilities. Not ideal for service-based or brand-driven companies.

How Buyers Think About Business Value

Buyers don’t just look at spreadsheets — they look at risk and return.

• Risk: How likely is the business to continue performing after the current owner leaves? Is revenue tied to one customer? Does the owner do all the selling?

  
  

• Return on Investment (ROI): What kind of payback period and ongoing return will they get based on the purchase price?

  
  

• Transferability: Can the business be handed off without major disruption? Are key systems, staff, and documentation in place?

The more you reduce risk and increase transferability, the higher your business’s value.

Online Tools vs. Hiring a Professional

Free Valuation Tools

There are many free online business valuation calculators that can give you a rough estimate. These can be helpful as a starting point — but they often oversimplify and don’t account for your business’s unique strengths or weaknesses.

Certified Valuations

A professional business appraisal gives you a credible, defensible valuation that buyers can trust. If you're serious about selling, this is the smart way to go. It also shows buyers you're serious and helps avoid unnecessary haggling.

Ready to Find Out What Your Business Is Worth?

Before you list your business or start talking to buyers, get clear on its true value. A strategic valuation helps you:

• Price your business confidently

• Attract serious buyers

• Maximize your exit value

Get a Free Business Valuation Consult Today »

Let’s talk about your business, goals, and what it’s truly worth in today’s market — no cost, no pressure. I would love the opportunity to walk you through the process.

Need more guidance?  I help small business owners nationwide prepare for a successful sale by offering fast, affordable, and accurate valuations.

Bonus: Frequently Asked Questions

How do I calculate SDE for my small business? Start with net profit, then add back your salary, owner perks, interest, depreciation, and one-time expenses. This gives buyers a clearer view of cash flow.

How long does it take to sell a small business? It depends, but most take 6–12 months from listing to closing. Having a valuation upfront speeds up the process significantly.