How to value a small business: 5 methods that actually work

There is no "the" valuation

A business is worth what a buyer will pay. The methods below are starting points for negotiation — anchors, not answers. Two valuations for the same business can be 2-3x apart depending on the buyer's strategic fit, financing structure, and timing.

1. Seller's Discretionary Earnings (SDE) multiple — the small business default

SDE = pre-tax earnings + owner's salary + interest + depreciation + one-time / non-recurring expenses. It's the cash flow available to a new owner-operator.

For most owner-operated small businesses under $5M revenue, value = SDE × 2-4x. Multiple ranges by industry:

• Service business (consulting, agency) — 1.5-2.5x
• Restaurant / hospitality — 1.5-2.5x
• Retail — 2-3x
• Manufacturing — 3-4x
• B2B SaaS — 4-8x (or revenue-multiple instead — see below)
• Healthcare practice — 3-5x

Worked example: contracting business with $250k SDE × 3x = $750k.

2. EBITDA multiple — for larger businesses + private equity

EBITDA = Earnings Before Interest, Taxes, Depreciation, Amortization. Used when the buyer plans to install management (not owner-operate). Above $1M EBITDA, the buyer pool shifts to PE + family offices, and multiples expand.

Typical 2026 ranges by deal size:

• $1-3M EBITDA — 4-6x
• $3-10M EBITDA — 6-9x
• $10M+ EBITDA — 8-12x (or higher for tech)

3. Revenue multiple — primarily for SaaS + high-growth

Used when profit is suppressed by growth investment (typical of SaaS). 2026 ranges for B2B SaaS:

• Sub-$1M ARR, growing 50%+ — 4-8x ARR
• $1-10M ARR, growing 50%+ — 6-12x ARR
• Profitable, slow-growth SaaS — 3-5x ARR
• Declining SaaS — 1-2x ARR or asset value

Multiples have compressed significantly from 2021 peaks (20x+) — anyone selling at old comps now is in for disappointment.

4. Asset-based valuation — for capital-heavy or distressed

Value = book value of tangible assets - liabilities, sometimes with goodwill added. Used for liquidation scenarios, real-estate-heavy businesses, manufacturing with significant equipment.

Almost always lower than earnings-based methods. The exception: businesses where the real estate or equipment is worth more than the operating business itself.

5. Discounted Cash Flow (DCF) — used by sophisticated buyers

Project 5-10 years of free cash flow, discount back to present value at appropriate rate (typically 12-25% for small business), add terminal value. Most accurate in theory, most subjective in practice — small changes to growth rate or discount rate move the answer by a lot.

In SMB deals, DCF is usually a check on the multiple-based valuations, not the primary method.

What affects the multiple within the range

• Customer concentration — one customer = 30%+ of revenue pulls multiple down by 1-2 turns
• Owner dependence — if the business stops without the owner, multiple drops 30-50%
• Recurring revenue % — higher recurring = higher multiple
• Growth rate — 30%+ growing earns premium; declining loses 1-2 turns
• Customer retention — net revenue retention > 100% is a major value driver
• Documentation quality — clean books, written processes, real management team = top of range

Process matters as much as multiple

A business sold via competitive auction with 3-5 bidders typically clears 20-40% higher than one sold to a single buyer. If you're a seller: run a process. If you're a buyer: try to be the only one at the table.

See our search-fund guide if you're considering acquiring rather than starting.