Business Valuation Calculator

How Business Valuation Works

Business valuation is the process of determining the economic value of a company. For most small and medium-sized businesses, valuation is driven by a single metric: how much consistent, transferable profit the business generates for its owner. That number — Seller's Discretionary Earnings (SDE) — forms the basis for the vast majority of transactions under $5M in enterprise value.

The SDE Multiple Method (Under $5M Revenue)

SDE is calculated by taking the business's net profit and adding back the owner's compensation, non-cash expenses like depreciation and amortization, and any personal or one-time expenses that ran through the business. This number represents the total financial benefit available to a new buyer who steps into the owner role.

Buyers then apply a "multiple" to that SDE figure — essentially paying X years of earnings upfront. Multiples vary significantly by industry, business age, owner dependency, and market demand. A landscaping company might sell for 2.0x SDE while a SaaS business with recurring revenue could command 5x–8x.

The EBITDA Method (Over $5M Revenue)

For businesses with $5M or more in annual revenue (or $1M+ in EBITDA), the preferred metric shifts to EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. Unlike SDE, EBITDA does not add back the owner's compensation, because at this scale the business typically has a management team in place. Private equity buyers, strategic acquirers, and institutional lenders all work in EBITDA multiples for mid-market transactions.

What Drives Business Value

1. Recurring Revenue

Predictable, contractual revenue streams are the single most powerful value driver. Businesses with subscription models, long-term service contracts, or retainer clients command significantly higher multiples. Buyers pay premium prices for certainty — a plumbing company with 200 commercial maintenance contracts is worth far more than one that only does one-off jobs.

2. Owner Dependency

The more the business can run without the current owner, the more a buyer will pay. If the business's revenue, key relationships, or specialized knowledge would walk out the door with the seller, buyers discount heavily. Reducing owner dependency before listing is one of the highest-ROI improvements a seller can make.

3. Customer Concentration Risk

If one or two customers represent more than 20-25% of your revenue, buyers will flag this as a major risk. Losing that anchor client post-sale could be catastrophic. Diversifying your customer base before selling can meaningfully increase your multiple.

4. Growth Trend

Buyers are purchasing the future, not the past. A business with 15% year-over-year revenue growth will command a higher multiple than one that has been flat or declining, even if the absolute SDE numbers are identical. Be prepared to show trailing 12-month and year-over-year comparisons.

5. Industry Outlook

Some industries are structurally more attractive to buyers. Businesses in fragmented industries ripe for consolidation, essential services, or sectors with demographic tailwinds (healthcare, home services for aging populations) trade at premiums. Discretionary retail and single-location restaurants tend to trade at discounts.

Common Mistakes in Business Valuation

• Using revenue as the base metric: Revenue is not the primary valuation driver — SDE is. A $2M revenue business with $80K SDE is worth far less than a $500K revenue business with $200K SDE.
• Confusing asset value with business value: Unless you are running an asset-heavy business (manufacturing, trucking), the value of your equipment and inventory is separate from your going-concern value. Most buyers are buying earnings, not stuff.
• Ignoring addbacks: Many owners understate their SDE by failing to identify and document legitimate addbacks. Personal car payments, health insurance, family wages — all of these increase your SDE when properly presented to a buyer.
• Anchoring on a number you need: The market sets price. Pricing too high burns six months and stigmatizes the listing. Get a professional opinion of value before listing.
• Not preparing financials 2+ years in advance: Buyers and SBA lenders want three years of clean, CPA-prepared financial statements. If your books are messy, clean them up 24 months before your target exit date.

When to Get a Professional Valuation

An online calculator gives you a solid baseline range for planning purposes. But several situations require a formal, defensible valuation from a credentialed professional:

• You are listing the business for sale and need a price to anchor negotiations
• A partner or co-owner is buying you out (or vice versa)
• The business is part of an estate or divorce proceeding
• You are applying for an SBA loan using business value as collateral
• You are seeking outside equity investment

Professional valuations are conducted by Certified Business Appraisers (CBA) or Certified Valuation Analysts (CVA). Fees typically range from $3,000–$10,000 depending on business complexity. Business brokers often provide informal Broker Opinion of Value (BOV) assessments at no charge if you are preparing to list.

Frequently Asked Questions