Determining what a business is worth is the critical first step in any acquisition or exit strategy. While a formal appraisal is ideal during final deal negotiations, understanding standard valuation metrics allows buyers and sellers to establish realistic expectations early in the process.
Common Valuation Methods
- SDE Multiple (Seller’s Discretionary Earnings): The standard metric for small businesses (typically under $5M in revenue). SDE adds back personal expenses, owner salary, and non-recurring costs to reflect true earning potential. Most small businesses sell between 2.0x and 4.0x SDE.
- EBITDA Multiple: Used primarily for larger mid-market businesses ($5M+ revenue) where owner management is separate from operations. Multiples typically range from 4.0x to 8.0x+ depending on growth rate and sector.
- Asset-Based Approach: Calculates the net value of physical assets (equipment, inventory, real estate) minus liabilities. Best suited for asset-heavy or distressed sales.
Key Variables Impacting Your Valuation Multiple
- Revenue Concentration: Low reliance on a single customer increases valuation.
- Standard Operating Procedures (SOPs): Well-documented systems mean the business can run smoothly without the founder.
- Growth Rate: Consistent year-over-year revenue growth commands a premium multiple.
