Small business valuation: how it works, in plain English
Short answer
Small businesses are usually valued as a multiple of their earnings: seller's discretionary earnings (SDE) for owner-run businesses, EBITDA for larger ones with management. The multiple reflects risk and transferability: how dependable the earnings are, how much they depend on the owner, and how easily they'd survive a change of owner.
Formal valuations use three approaches (income, market and asset) and are done by credentialed appraisers. For an SBA-financed purchase, the lender orders its own. This page explains how it works in general. OKtoBuy's Deal Check doesn't value a business; its optional Value estimate is a clearly labelled estimate, not an appraisal.
A business is worth what a buyer will pay for the cash it's going to produce, adjusted for how confident the buyer can be that the cash will actually show up. Every valuation method is a different way of answering that one question. For small businesses, the practical shortcut is an earnings multiple, and most of the skill is in getting the earnings right and choosing a multiple that reflects the real risk.
Our position: OKtoBuy's Deal Check never values a business or comments on an asking price. The separate Value estimate gives a range from published multiples, as an estimate only. A sister business may prepare valuations for lenders, and we keep the two separate. This guide is general education.
Start with the right earnings
The multiple gets the attention, but the earnings figure does more damage when it's wrong. If a business's real SDE is $200,000 and the listing says $260,000, a perfectly reasonable multiple applied to the wrong number overstates the value by the multiple times $60,000.
- SDE (seller's discretionary earnings): pre-tax profit plus one owner's pay, interest, depreciation, amortization, and personal or one-time costs. Used for owner-operated businesses.
- EBITDA: earnings before interest, taxes, depreciation and amortization, after paying a market salary for management. Used once a business has a team that runs it. See SDE vs EBITDA.
- Revenue: used for some recurring-revenue businesses (software, insurance agencies, some services) where earnings understate what a buyer gets. See revenue multiples.
Appraisers normalize earnings first: remove one-time items, adjust owner pay to market, fix related-party rent, and look at a trend over several years rather than the best one.
The three approaches
| Approach | The question it asks | Common methods | When it leads |
|---|---|---|---|
| Income | What are the future cash flows worth today, given the risk? | Capitalization of earnings; discounted cash flow | Stable, profitable businesses |
| Market | What have buyers paid for similar businesses? | Multiples from comparable transactions | Main Street deals with good comparable data |
| Asset | What are the assets worth, less liabilities? | Adjusted net assets; liquidation value | Asset-heavy or unprofitable businesses; sets a floor |
A formal valuation usually considers all three and explains which it relied on. For more on each, read small business valuation methods.
Where multiples come from
A multiple isn't a law of nature. Appraisers derive it from databases of completed small business sales (several commercial databases collect them from brokers and appraisers), then adjust for how the business in front of them compares. Broker associations also publish surveys of recent deals. Listing sites show asking prices, which tell you what sellers hope for, not what buyers paid.
That's why we don't publish "typical multiples" tables on this site. Free tables online often mix asking and sold prices, SDE and EBITDA, and tiny and large deals, and the resulting averages are easy to misuse.valuation multiples by industry.
What moves the multiple
| Factor | Lower risk (higher multiple) | Higher risk (lower multiple) |
|---|---|---|
| Size of earnings | Larger, more stable earnings | Small earnings that one bad month can wipe out |
| Owner dependence | Managers run it; owner is replaceable | Owner holds the relationships, licence or skill |
| Revenue quality | Recurring contracts, many customers | One-off projects, a few large customers |
| Trend | Steady or growing for years | Peaked last year, or volatile |
| Books | Clean, match the returns and the bank | Cash, unexplained gaps, big add-backs |
| Location and lease | Long lease, transferable, market rent | Short lease, landlord problems |
| Assets | Well-maintained equipment | Deferred maintenance, capex coming |
| Industry | Stable demand, regulatory moat | Declining demand, low barriers |
An illustration of how sensitive value is
Illustrative arithmetic, not a valuation of anything
Take a business with $300,000 of claimed SDE, of which $60,000 is shaky add-backs. At any multiple m, the shaky part represents $60,000 × m of value. If m were 3, that's $180,000. If verified earnings are $240,000 and the risk factors also push the multiple down by half a turn, the combined effect is larger still: the earnings error and the multiple error compound.
This is why the first job is verifying the earnings. A buyer can argue about multiples forever; a documented earnings figure ends most arguments.
Formal valuations and SBA loans
For an SBA 7(a) purchase, the lender must order a business valuation from a Qualified Source: someone who regularly does business valuations and holds an ASA, CBA, ABV, CVA or BCA credential, independent of the loan decision. It has to be prepared for the lender, not for you or the seller, and has to support the purchase price. If you pay more than it supports, the excess must be equity, and total debt can't exceed it. For 7(a) Small and SBA Express loans with a business purchase price of $350,000 or less, SBA's September 2026 technical update allows the lender to do an internal valuation instead. See SBA business valuation.
Outside SBA deals, buyers sometimes hire their own appraiser, especially for larger deals, partner buyouts and disputes. Your CPA can recommend one.
Valuation vs what you can pay
Value is one question. What you can afford to pay is another, and it's often the binding one. Your price has to leave enough earnings to pay yourself, service the debt at 1.25 times or better for an SBA loan, and reinvest. Read how to value a business to buy for the buyer's version, and use the DSCR calculator to see whether a given price can be financed.
What makes a business worth more to a buyer
A business is worth more when its earnings are larger, more predictable and easier to transfer to a new owner. The biggest drivers are recurring revenue, a business that runs without the owner, clean books that match the tax returns and the bank, many customers rather than a few, a steady or growing trend, a long transferable lease and well-maintained equipment.
Each driver reduces the risk a buyer takes, and lower risk supports a higher multiple.
Buyers pay for future cash and discount it for risk. Everything that makes the future cash more certain, or less dependent on the person leaving, pushes value up. This works as a checklist whether you're judging a listing or deciding what to improve after you buy.
The value drivers
| Driver | What it looks like | How to verify it |
|---|---|---|
| Recurring revenue | Contracts, subscriptions, service agreements, routes | Contract list, renewal history, churn |
| Owner independence | Managers run daily work; owner sets direction | Ask staff who decides; owner's calendar |
| Clean books | P&L matches returns and bank | Proof of cash, transcripts |
| Diversified customers | No customer is a large share | Revenue by customer, 3 years |
| Steady trend | Consistent results over years | Monthly P&Ls, TTM |
| Transferable lease | Long term, options, landlord consent | Lease, estoppel |
| Maintained assets | No capex backlog | Equipment list, repair history |
| Documented systems | Written processes, software in use | Ask to see them |
| Stable team | Low turnover, trained staff | Payroll tenure |
| Barriers to entry | Licences, location, reputation | Competitive check |
Using this as a buyer
Score the business on each driver before you agree a price. Weak scores aren't deal-breakers, but each one should show up somewhere: in the price, in structure (a seller note, a longer transition), or in your plan for the first year. And remember that the drivers you improve after closing, like documenting systems or reducing owner dependence, are your upside if you ever sell. See SDE multiples and customer concentration.
Asset-based valuation: when a business is worth its stuff
An asset-based valuation adds up what the business's assets are worth (equipment, vehicles, inventory, receivables, sometimes real estate) at fair value and subtracts its liabilities. It's used when a business earns little relative to its assets, is asset-heavy, or might be wound down. It also sets a rough floor under value for profitable businesses.
The key question is which value: what the assets are worth in use as part of a running business, or what they'd fetch in a quick sale. The two can be far apart.
Most small businesses sell for more than their assets, because they earn more than the assets alone would. But for some businesses, assets are most of the story: struggling companies, equipment-heavy trades, and businesses where earnings are too thin to support goodwill.
Three asset values
| Value | Means | Typically |
|---|---|---|
| Book value | Cost minus tax depreciation | Can be near zero for usable equipment (Section 179, bonus depreciation) |
| Value in use | Fair market value as part of an operating business | Highest |
| Liquidation value | What a sale would bring, net of costs | Lowest, especially if forced |
When asset value leads
- The business barely makes money, so there's little or no goodwill. See buying a failing business.
- It's a holding of equipment, vehicles or inventory more than a set of customer relationships.
- The buyer's plan is to use the assets differently.
Valuing assets honestly
- Get an equipment list with make, model, year, condition and serial numbers.
- Compare with used-equipment prices or a dealer's opinion; consider an equipment appraisal for big-ticket items.
- Count inventory and value it at cost, excluding obsolete or damaged stock. See inventory.
- Age receivables; old ones may not be collectible.
- Subtract every liability, including leases, deposits and accrued wages.
- Account for equipment near the end of its life. See deferred maintenance.
Frequently asked questions
What is the most common way to value a small business?
A multiple of earnings. Owner-operated businesses are usually priced on SDE; larger businesses with a management team on EBITDA. The multiple comes from comparable sales and the specific risks of the business.
What's a typical multiple for a small business?
It varies widely with size, industry, growth, owner dependence and the quality of the earnings. Appraisers base multiples on databases of actual transactions, adjusted for the business in front of them. Be skeptical of any single rule-of-thumb number.
Who can do a formal business valuation?
Credentialed appraisers. For SBA loans, the valuation must generally come from an individual with an ASA, CBA, ABV, CVA or BCA credential, ordered by and prepared for the lender; 7(a) Small and SBA Express loans with a business purchase price of $350,000 or less may use an internal lender valuation.
Does OKtoBuy value businesses?
No. OKtoBuy checks the earnings that a valuation would be based on. It never gives a value, a price range or an opinion on an asking price.
What increases a small business's value most?
Reducing owner dependence and proving earnings with clean, verifiable books usually have the biggest effect, because they cut the two biggest risks buyers face.
Does growth always increase value?
Growth that's documented and sustainable does. A spike in the last few months before a sale, or growth bought with discounts, tends to be discounted by buyers.
Sources
- SBA SOP 50 10 8.1, Appendix 15: Business Valuation Requirements and Qualified Source
- IRS Form 8594 (allocation of purchase price among asset classes)
- SBA: Buy an existing business or franchise (valuation section)
- IRS Publication 946 (book value reflects tax depreciation)
- SBA Information Notice 5000-882227: Technical updates to SOP 50 10 8.1 (published Sept 25, 2026; effective Oct 1, 2026)
- Coleman Report: SBA releases SOP 50 10 8.1 technical update
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.