How to Value a Small Business

Value is a range, not a number

Any single valuation figure implies a precision that does not exist in small-business transactions. A defensible valuation is a range, with an explanation of what would move a buyer toward the top or the bottom of it.

Start with normalized earnings

Adjust reported profit for owner compensation, personal expenses and genuinely one-time items to reach SDE or EBITDA. Then apply a market multiple appropriate to the industry, size and quality of those earnings.

Adjust for quality

Recurring revenue, diversified customers, management in place, documented systems and growth all push the multiple up. Owner dependency, customer concentration, declining revenue, short leases and undocumented processes push it down.

Frequently asked questions

Does inventory get added to the valuation?

Often yes for asset-heavy businesses, but it should be stated explicitly. Whether inventory is inside or outside the asking price is a frequent point of negotiation.

Is a formal appraisal necessary?

For lending, estate or litigation purposes, yes. For an initial decision on whether to pursue a deal, a well-constructed range is usually sufficient.