What Is My Business Worth? A Guide to Business Valuation

Almost every owner who calls us opens with the same question, and it deserves a direct answer rather than a discovery call. This guide explains the nuances of valuation multiples and will give you a base understanding of business valuation.

One caution: a multiple is a starting point, not an answer. Two businesses in the same sector with identical earnings routinely sell 40% apart. The guide tells you the neighborhood.

How is a business valued?

For privately held businesses, value is normally calculated as earnings multiplied by a market multiple. The two inputs matter equally, and most valuation errors come from getting the earnings figure wrong rather than the multiple.

Adjusted earnings are not the profit on your tax return. They are that profit plus the expenses a new owner would not carry — your compensation above a market-rate manager's salary, personal vehicles, family members on payroll who do not work in the business, one-time legal costs, and similar. These are add-backs, and documenting them is one of the highest-return activities in the run-up to a sale. Every dollar of add-back a buyer accepts is worth a dollar times your multiple.

SDE or EBITDA — which applies to your business?

This is the distinction that causes the most confusion, and getting it backwards will make your business look either far more or far less valuable than it is.

SDE (seller's discretionary earnings) adds the owner's full compensation back into earnings. It is used for smaller, owner-operated businesses — broadly, those selling below about $2 million — where the buyer is expected to step into the owner's role.

EBITDA does not add back a market-rate manager's salary, because a business of that size is expected to run without the owner and that salary is a genuine ongoing cost. It is used above roughly $2 million in purchase price.

The same business will show a higher SDE than EBITDA — the difference is roughly a manager's salary. So an SDE multiple is applied to a bigger number, which is why SDE multiples look lower than EBITDA multiples. Comparing a 3x SDE multiple to a 5x EBITDA multiple directly is meaningless. This is the most common error in online valuation content.

What are the four business valuation methods?

Market approach (multiple of earnings)

Comparing your business to what similar businesses actually sold for, then applying a multiple to your adjusted earnings. This is the primary method for lower-middle-market sales because it reflects what buyers are genuinely paying. Pepperdine's 2025 Private Capital Markets Report found that a recast EBITDA multiple was the most-used

valuation method among advisors, cited by 76%.

Income approach (discounted cash flow)

Projecting future cash flows and discounting them to present value. Rigorous in principle, and highly sensitive to assumptions in practice — small changes in the growth or discount rate produce large changes in the answer. Most useful for businesses with predictable, contracted revenue.

Asset approach

Total assets minus liabilities. This sets the floor rather than the price for a profitable business, and it is the relevant method mainly for asset-heavy companies and for liquidation scenarios. If your asset value exceeds your earnings-based value, that is important information about the business.

Capitalization of earnings

Dividing expected ongoing earnings by a capitalization rate. Suited to businesses with stable, predictable earnings and little expected growth.

In practice a credible valuation runs more than one method and reconciles them. A single number produced by a single method should make you suspicious.

What moves your multiple within the range?

• Owner dependence — the biggest single factor. A business that runs without you is worth materially more than one that does not, at identical earnings.

• Customer concentration — any customer above 15–20% of revenue is a discount. Buyers price the risk that the relationship was yours, not the company's.

• Recurring and contracted revenue — underwritable revenue commands a premium over transactional revenue.

• Quality of financials — statements that reconcile to tax returns and add-backs that are documented rather than asserted. Undocumented add-backs get stripped in diligence.

• Margin trend — three years of stable or improving margin beats a higher margin that is declining.

• Growth runway — a buyer pays for what they can do next, but only where the opportunity is credible and evidenced.

Why online valuation calculators get it wrong

Free calculators apply a generic sector multiple to a number you type in. They cannot verify your add-backs, which is where most of the value sits. They cannot see customer concentration or owner dependence. They do not know what businesses like yours actually closed at in your market this year, because that data is not public.

The result is a number that is usually wrong in one of two costly directions. Too high, and you go to market overpriced, sit unsold, and take the discount that a stale listing carries. Too low, and you accept an offer you should have countered, or you never go to market at all.

Frequently asked questions

What is the difference between SDE and EBITDA?

SDE adds the owner's full compensation back into earnings and is used for owner-operated businesses selling below roughly $2 million. EBITDA does not add back a market-rate manager's salary and is used above that threshold. The same business shows a higher SDE than EBITDA, which is why SDE multiples appear lower.

How do I increase what my business is worth?

Reduce owner dependence, diversify customer concentration below 15–20% per client, convert transactional revenue to contracted revenue, clean up financials so they reconcile to tax returns, and document add-backs. Most of these take two to three years to show up in the numbers a buyer sees, which is why valuation work belongs at the start of an exit plan.

What are add-backs and why do they matter?

Add-backs are expenses a new owner would not carry — owner compensation above market rate, personal vehicles, non-working family members on payroll, one-time costs. They increase adjusted earnings, and because value is earnings times a multiple, each accepted dollar of add-back is worth several dollars of price. Undocumented add-backs get removed during diligence.

Is a business valuation the same as an appraisal?

No. A formal appraisal is prepared to a defined standard for legal, tax, or litigation purposes. A broker's valuation is a market opinion of what buyers would realistically pay in current conditions. For sale planning, the market view is the more useful of the two.

How much does a business valuation cost?

Archstone Business Brokers provides a confidential valuation at no cost and with no obligation to sell. Formal appraisals prepared for tax or litigation purposes are a separate service and are typically priced in the low thousands.

Get a confidential valuation

The guide above will put you in the know. Getting to an actual number takes a look at your financials, your add-backs, and your customer mix. Our Senior M&A Advisors have completed more than 100 transactions representing over $600 million in deal value, working with businesses generating $1 million to $50 million in revenue. The valuation is free, confidential, and carries no obligation.

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