Whether you are buying a company, selling one, or planning your next move, the first question is always the same: what is it worth? The honest answer is a range, not a single number — and the way you build that range is well established. This guide walks through the methods professionals use, so you can read a deal with rigor instead of guesswork.
When you are ready to put numbers to it, the free valuation calculator applies the same earnings-multiple method described below and returns an instant low, mid, and high estimate.
What "value" really means
Valuation estimates fair market value — the price a willing buyer and a willing seller would agree on, each informed and neither under pressure. Two ideas matter from the start:
- Value is a range, not a point. A single figure implies a precision that does not exist. Real value depends on growth, risk, and who is at the table, so a credible estimate is always a band with a reasonable mid-point.
- Value is not the same as price. Value is what the business is worth on the fundamentals; price is what a specific buyer pays after competition, deal structure, and negotiation. The two can differ meaningfully.
The three valuation approaches
Every valuation method belongs to one of three families. Most real-world valuations lean on one and sanity-check with another.
| Approach | How it works | Best for |
|---|---|---|
| Income | Projects future cash flows and discounts them to today (DCF) | Stable, forecastable businesses; buyer-side rigor |
| Market | Applies an earnings multiple from comparable companies or deals | Most small and lower-middle-market businesses |
| Asset | Nets tangible and intangible assets against liabilities | Asset-heavy, holding, or distressed businesses; sets a floor |
For the businesses most people actually buy and sell — owner-operated companies and lower-middle-market firms — the market approach with an earnings multiple is the workhorse. The rest of this guide focuses there, then returns to DCF and asset value as cross-checks.
Earnings multiples: SDE vs EBITDA
An earnings multiple is simple in form: adjusted earnings × an industry multiple = value. The art is in choosing the right earnings figure and the right multiple. The earnings figure is almost always one of two measures.
SDE — Seller's Discretionary Earnings
SDE is profit plus the owner's salary, benefits, and discretionary spending, added back. It answers "how much total benefit does a single owner-operator take from this business?" Use SDE for owner-operated small businesses, typically under roughly $1M in earnings, where the buyer will run it themselves.
EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA assumes a hired manager is already paid as a normal operating cost. Use EBITDA for larger, manager-run businesses a buyer will not operate day to day. Because EBITDA does not add back an owner's salary, EBITDA multiples are higher than SDE multiples for the same business — so never compare an SDE multiple to an EBITDA multiple directly.
Rule of thumb: owner runs it → SDE. A manager runs it → EBITDA. Picking the wrong basis is the most common valuation mistake, and it can swing the answer by millions.
Normalizing earnings (add-backs)
Reported profit rarely reflects the true earning power a buyer inherits. Normalizing adjusts for owner-specific and one-time items so the multiple is applied to earnings a new owner can actually expect. Legitimate add-backs include:
- Owner compensation above (or below) market — normalize to what it would cost to replace the role.
- One-time, non-recurring costs — a lawsuit, a relocation, a failed product line.
- Discretionary personal expenses run through the business — a personal vehicle, travel, family on payroll who do not work.
- Non-operating items — income or costs from assets the buyer will not acquire.
Be disciplined. Aggressive or unsupported add-backs are the fastest way to lose credibility with a lender or an investment committee. Every adjustment should be documented and defensible.
Which multiple applies
Multiples are heuristics drawn from comparable transactions. They vary by sector and then move within a band based on the specifics of the business. Indicative ranges for the lower-middle market:
| Sector | SDE multiple | EBITDA multiple |
|---|---|---|
| Professional & B2B services | 2.0x – 3.5x | 3.5x – 6.0x |
| Home & trade services | 1.8x – 3.0x | 3.0x – 5.0x |
| Manufacturing | 2.5x – 4.0x | 4.0x – 6.5x |
| Healthcare services | 2.5x – 4.0x | 4.5x – 7.0x |
| SaaS & software | 3.0x – 5.0x | 5.0x – 9.0x |
| Restaurants & food service | 1.5x – 2.5x | 2.5x – 4.0x |
Within a sector band, these factors push toward the high end: recurring revenue, consistent growth, diversified customers, healthy margins, clean books, and a business that runs without the owner. These push toward the low end: customer concentration, owner dependence, declining or lumpy revenue, thin margins, and messy financials. A buyer is really paying for durable, transferable cash flow — the more durable and transferable, the higher the multiple.
Discounted cash flow, briefly
A discounted cash flow (DCF) values a business as the present value of the cash it will generate in the future. You project free cash flow for several years, estimate a terminal value, and discount everything back at a rate that reflects risk. DCF is more work and more sensitive to assumptions than a multiple, but it is powerful for two reasons: it forces explicit assumptions about growth and risk, and it produces a valuation you can defend line by line. Serious buyers often build a multiple-based range first, then use a DCF to pressure-test whether the price makes sense given the cash flows.
Enterprise value vs what you actually pay
The output of a multiple or DCF is usually enterprise value — the value of the business itself. What changes hands at closing is different, and the gap surprises first-time buyers:
- Cash-free, debt-free. Most deals assume the seller keeps the cash and clears the debt, so existing debt reduces what the buyer pays and surplus cash is settled separately.
- Working capital peg. The buyer expects a normal level of working capital to come with the business; a shortfall or surplus adjusts the price at close.
- Deal structure. Earnouts, seller financing, and equity rollovers shift risk and change the headline number. A higher price with an earnout can be worth less than a lower all-cash price.
This is why a clean valuation range is the start of the conversation, not the end of it.
A worked example
Take an owner-operated home-services business with $400,000 in SDE after legitimate add-backs, steady growth, and a typical risk profile. At a home-services SDE band of roughly 1.8x to 3.0x, the indicative range is about $720,000 to $1,200,000, with a mid-point near $960,000. Strong recurring contracts and low customer concentration would push toward the top; heavy reliance on the owner would pull toward the bottom. The valuation calculator runs exactly this math — enter your earnings, sector, and growth and risk profile, and it returns the range instantly.
Making it defensible
A number is easy. A number that holds up — in front of a lender, a seller, or an investment committee — is the hard part, and it is where deals are won or lost. A defensible valuation shows its work: which earnings basis, which add-backs and why, which multiple and the comparables behind it, and how growth and risk moved the range. That transparency is exactly what Acquiror is built to produce — AI-assisted valuations and due diligence where every assumption is visible and ready to defend.