How is a small business actually valued?
Three approaches dominate, and a credible valuation triangulates between them rather than relying on one. The income approach applies a multiple to earnings — usually EBITDA or seller's discretionary earnings — and is what most small-business sales turn on. The market approach compares recent sales of similar businesses in the same sector and size band. The asset approach values what the business owns minus what it owes, and sets the floor: no rational seller accepts less than liquidation value. Where the three disagree sharply, that gap is itself information about risk.
What is an EBITDA multiple and what drives it up or down?
The multiple is the number you pay per unit of annual earnings — a business earning 200,000 sold at 4x is worth 800,000. Multiples are lower for small, owner-dependent businesses (often 2–4x) and higher for larger, systematised ones (6–10x and beyond). What lifts a multiple: recurring revenue, contracts that survive the sale, a diverse customer base, documented processes, and a management team that stays. What crushes it: revenue concentrated in one or two clients, an owner who is the business, declining sales, or messy books.
What is seller's discretionary earnings and why does it differ from EBITDA?
SDE adds the owner's salary and personal benefits back to profit, on the logic that a new owner-operator would take those benefits themselves. It is the standard measure for businesses small enough that one person runs them. EBITDA excludes owner compensation and is used once a business is large enough to employ a manager. Using the wrong one badly distorts the answer — an SDE multiple applied to EBITDA can understate value by a third or more.
Why do buyers and sellers arrive at such different numbers?
Because they weight risk differently, and both are being rational. Sellers price in the effort they invested and the potential they see. Buyers price in what happens if key customers leave, if the owner's relationships do not transfer, and what the business earns without the seller in it. The gap is usually bridged with structure rather than price — an earn-out that pays more if performance holds, a transition period, or vendor financing that keeps the seller invested in the handover.
How much do intangible assets change the figure?
Substantially, and they are the hardest part to price. Brand recognition, customer lists, proprietary processes, licences and trained staff rarely appear on a balance sheet but often account for most of what a buyer is purchasing. Goodwill is essentially the residual — the amount paid above identifiable net assets. If your valuation is mostly goodwill, expect buyers to scrutinise how durable it is without you.
Is a calculator enough, or do I need a formal valuation?
A calculator is right for orientation: testing whether a price is broadly plausible, planning an exit timeline, or deciding whether to start a conversation. It is not enough for anything binding. Sale negotiations, tax filings, divorce settlements, shareholder disputes and financing all need a qualified valuer who can examine the accounts, normalise the earnings and defend the figure. Treat the output here as a starting range, not a number to put in a contract.