How to value a small business
Valuation is not one number. It is a defensible range you build from normalized earnings, a market multiple, the balance sheet, and what the deal can actually finance.
Direct answer: Value a small business by normalizing its earnings into SDE or EBITDA, multiplying by a market multiple for its size, industry and risk, adding transferable assets such as inventory, then subtracting debt assumed. Finally, confirm the resulting price still services its acquisition loan and pays you a return.
Step 1 — Normalize earnings
Start from the tax return, not the seller's spreadsheet. Add back one owner's compensation, non-cash charges, interest, taxes and genuinely non-recurring costs to get seller's discretionary earnings (SDE). Remove revenue that will not transfer and normalize below-market rent or unpaid family labor.
Step 2 — Use three years, weighted
One good year is not a trend. Weight recent years more heavily (for example 50/30/20) and investigate any year that moves more than 15%. A business with declining earnings is valued on the trend, not the peak.
Step 3 — Pick a defensible multiple
Multiples rise with size, recurring revenue, documented systems, customer diversification and a management layer. They fall with owner dependence, customer concentration, short lease terms, regulatory risk and declining revenue. See what a good SDE multiple looks like for ranges.
Step 4 — Adjust for assets and liabilities
Enterprise value = (SDE × multiple) + saleable inventory at cost + non-operating assets − debt assumed
Most small deals are asset sales delivered debt-free and cash-free with a normal level of working capital. Confirm in writing what the price includes: equipment, vehicles, inventory, receivables, deposits and domain names.
Step 5 — Cross-check with other approaches
- Market approach: comparable sold multiples in the same industry and size band.
- Asset approach: the liquidation floor — useful when earnings are weak.
- Income approach: discounted future cash flows, which matters when growth is real and documented.
If the three disagree widely, the difference is a risk you have not priced yet.
Step 6 — Stress-test the price you land on
A valuation you cannot finance is theoretical. Check debt service coverage (annual earnings after your salary divided by annual loan payments — lenders typically want 1.25x or better), cash-on-cash return on your down payment, and payback period. Then re-run it with a 20% drop in revenue.
Run the whole calculation on a real listing
The AcquireAI small business valuation calculator performs steps 3 to 6 automatically: valuation range, loan amortization, debt service coverage, ROI, payback and a deal score from the numbers you enter.
Frequently asked questions
What is the quickest way to value a small business?
Multiply normalized SDE by a market multiple for the industry and size, then add saleable inventory. For most owner-operated businesses this puts you within a reasonable range in minutes; the diligence work is verifying the SDE.
Does revenue matter for valuation?
Revenue matters mostly as context for the earnings. Revenue multiples are only used where profit is not meaningful, such as fast-growing or subscription businesses.
Should I pay for goodwill?
You are paying for goodwill whenever price exceeds tangible asset value. It is justified only when the earnings that create it transfer to you — recurring customers and documented systems transfer; a retiring owner's personal relationships often do not.
Do I need a professional appraisal?
A formal appraisal is worth it for financing, partner buyouts, disputes or taxes. For screening deals, a disciplined SDE-and-multiple calculation is enough to decide whether to keep going.