Most business owners have a number in their head. What they'd accept for the business if someone made an offer. The problem is that the number is usually based on what they need, not what a buyer would actually pay.
Understanding how buyers think about value - before you're in a sale process - changes how you run your business. It also changes what you prioritize in the years leading up to an exit.
Here's how buyers actually calculate what a business is worth.
This is the most common valuation method for small businesses - typically those generating under $2 million in annual profit.
SDE starts with your net profit and adds back your owner's salary, owner benefits, one-time expenses, and any personal expenses run through the business. The idea is to show a buyer what the business actually generates for a single working owner — a clean number that reflects the true earning power of the business before the current owner's compensation structure is applied.
Once SDE is calculated, it gets multiplied by an industry-specific number — usually somewhere between 2x and 4x for small businesses, though this varies significantly by industry, growth rate, and how dependent the business is on the owner personally.
Example: A marketing agency in Orange County generates $180,000 in net profit. The owner pays herself $90,000, runs $15,000 in personal expenses through the business, and had a one-time equipment purchase of $10,000 last year. Adjusted SDE is $295,000. At a 3x multiple, the business is worth roughly $885,000.
The multiple isn't fixed. A buyer will push down the value of the business if the business heavily relies on the owner's relationships, if there are inconsistent financials, or if there is no clear operational process without the current owner.
Asset-based valuation looks at what the business owns (equipment, inventory, real estate, receivables) minus what it owes. This is the second most common valuation process. It's most relevant for businesses where the physical assets are the primary value driver: manufacturing, real estate holding companies, businesses with significant equipment or inventory.
If your balance sheet is the most accurate picture of your business value, it needs to be accurate.
Equipment listed at original purchase price when it's fully depreciated, or receivables that haven't been collected in 18 months still showing as assets, those create problems in due diligence.
For service businesses, asset-based valuation often produces the lowest number because the primary value is in the client relationships, the recurring revenue, and the systems the owner has built.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This method is more common for larger businesses, typically those generating over $1 million in profit, and is the standard framework used by private equity buyers and strategic acquirers.
Unlike SDE, EBITDA doesn't add back the owner's salary. It assumes the business has or will have professional management in place. That makes it a better measure of the business as a standalone entity rather than as an owner-operated income source.
EBITDA multiples for small to mid-size businesses typically range from 3x to 6x, though businesses in high-growth industries or with strong recurring revenue can command higher.
If your business is at a stage where EBITDA is the right lens, your financial statements need to be clean, categorized correctly, and reconciled — not reconstructed at tax time. Buyers at this level will conduct detailed due diligence which means inconsistencies in the books will reduce the multiple, not just the headline number.
Revenue multiples are used in specific situations, typically when a business isn't yet profitable, when it's in a high-growth industry where future potential matters more than current earnings, or when the business is being acquired primarily for its customer base or market position.
A software business, a fast-growing agency, or a business with strong recurring contracts might be valued at 1x to 3x annual revenue regardless of current profitability, because the buyer is paying for what the revenue base could generate under different ownership or with different cost structures.
For most traditional small businesses, professional services, trades, revenue multiples are not the primary method. But they're worth understanding because buyers will sometimes reference them in negotiations as a ceiling or floor on what they're willing to pay.
Regardless of which method a buyer uses, the negotiation almost always involves pressure on the multiple or the earnings figure. Here's what gives them ammunition:
Owner dependency. If the business can't operate without you — if your relationships are the reason clients stay, if you're doing the work that would need to be replaced — a buyer will discount the multiple. They're pricing in the risk that revenue walks out the door when you do.
Inconsistent financials. If your profit looks different depending on which year you look at, or if your books required significant cleanup before you could produce them for due diligence, buyers assume there's more they're not seeing. Clean books, maintained consistently, are one of the most straightforward ways to protect your valuation.
Customer concentration. One or two clients making up 40-50% of revenue is a risk that buyers price in aggressively. If that client leaves post-sale, the business the buyer paid for no longer exists in the same form.
Declining or inconsistent margins. A business with stable or improving margins tells a cleaner story than one where profitability bounces around. Buyers model forward — they want to see a trend they can rely on.
No documented processes. A business that runs on the owner's institutional knowledge rather than documented systems is harder to transfer. Buyers will either discount thisdiscount for this or require the owner to stay on longer post-sale to transfer that knowledge.
The owners who get the best outcomes in a sale are rarely the ones who prepared the hardest in the final six months. They're the ones who understood how buyers think years earlier, and ran their business accordingly, clean books, documented processes, diversified revenue, and a profit trend that tells a clear story.
You don't need to be planning an exit to benefit from thinking this way. A business that would sell well is also a business that runs well.
If you want to get a clearer picture of where your business stands today — what the numbers actually look like from a buyer's perspective — that's a conversation worth having with your accountant before you need it. Book a free initial consult with NCO and we'll work through it with you.
Which valuation method applies to my business? It depends on your industry, your revenue size, and your profit level. Most small service businesses are valued on SDE. As businesses grow past $1-2 million in profit, EBITDA becomes the more common framework. Your accountant can tell you which lens a buyer is most likely to apply and what your number looks like under each method.
How do I know what multiple my business would get? Multiples vary by industry, growth rate, owner dependency, and how clean the financials are. A profitable, well-documented business with diversified revenue in a stable industry will command a higher multiple than one with the same earnings but messier books and a single dominant client. There are industry benchmarks, but the multiple is ultimately negotiated — and your preparation determines how much leverage you have.
Does my business need to be profitable to have value? Not always, but for most traditional small businesses, profitability is the primary driver of value. A business with strong recurring revenue contracts, a large customer base, or significant intellectual property might be valued on revenue or assets even without consistent profit. If your business isn't currently profitable, an accountant can help you understand what's driving that and whether it's something a buyer would look past.
When should I start thinking about valuation? Earlier than you think. If selling the business is part of your retirement plan, understanding your number three to five years out gives you time to actually move it. Waiting until you're ready to sell means you get whatever the business is worth today — not what it could be worth with some intentional preparation.
What's the difference between an asset sale and a stock sale in California? In an asset sale, the buyer purchases specific assets of the business. In a stock sale, they purchase your ownership interest directly. The tax treatment differs for both the buyer and the seller, and California's treatment adds another layer. This is one of the most consequential decisions in a sale structure and worth discussing with your accountant and a transaction attorney well before you're in a deal.