How do you value a small business?

The dominant method for owner-operated businesses is a multiple of earnings, and the earnings figure used is seller's discretionary earnings, meaning net profit with the owner's salary, personal expenses run through the business, interest, taxes, depreciation, and one-time items added back. That produces the total financial benefit available to a single owner-operator. Multiples for small businesses commonly land somewhere between two and four times that figure, varying widely by industry, with larger companies valued on EBITDA at higher multiples because they are less dependent on any individual.

What moves the multiple is transferability. A business where the owner holds the client relationships, the technical knowledge, and the operating decisions is difficult to sell, because the buyer is purchasing a job that may evaporate when the owner leaves. Documented systems, a management team that runs daily operations, recurring or contracted revenue, a diversified customer base with no single client dominating, clean financial records, and long-term supplier and lease arrangements all raise it. Customer concentration is the most common value destroyer, since a business where one client is a large share of revenue carries obvious risk.

Two other approaches serve specific situations. Asset-based valuation, totaling the fair value of assets minus liabilities, sets a floor and is most relevant for asset-heavy or unprofitable businesses. Discounted cash flow projects future cash and discounts it to present value, which is rigorous in theory and highly sensitive to assumptions in practice, making it more common in larger transactions. Whatever the method, expect the actual price to be shaped by deal structure as much as by valuation: how much is paid at closing versus through a seller note or an earnout tied to future performance, and what non-compete and transition assistance the seller provides. Getting the books clean and reducing owner dependence takes a year or more, which is why the time to prepare a business for sale is well before you want to sell it.