Guide
Small Business Valuation
Small business valuation is more standardised than most owners expect. Below roughly $1M in earnings, nearly every transaction is priced the same way: recast earnings into Seller's Discretionary Earnings, apply an industry multiple, then adjust for risk. The disagreements are about inputs, not method.
The three methods, and which one actually gets used
The income approach values the business on its earnings, applying a multiple to SDE or EBITDA. This is what nearly every small business sale actually uses.
The market approach compares against recorded sales of similar businesses. It is a useful cross-check and it is where published multiples come from, but comparable data thins out quickly in niche categories.
The asset approach values the equipment, inventory and property. For a profitable operating business it usually sets a floor rather than a price. It becomes the primary method only when the business barely earns, in which case you are selling assets rather than a business.
Recasting: the step owners skip
Your tax return is designed to minimise reported profit. A valuation needs the opposite: the true earning power. Recasting adds back your compensation, personal expenses run through the business, one-time costs, interest and depreciation.
Every add-back has to be defensible with documentation. A buyer who cannot verify an add-back will not pay for it, and at a 3x multiple every unverified $10,000 costs you $30,000 of price.
Where the multiple comes from
Industry sets the band. Size moves you within it, since larger businesses reliably earn higher multiples than smaller ones in the same sector. Risk decides the rest: owner dependence, customer concentration, recurring revenue, margin quality and the direction of the trend.
The overall small business market averages near 2.5x SDE, but that average hides a wide spread. Use your own industry's band, not the average.
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