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.
For a deeper comparison, including the bridge between the two, which multiple applies to your deal, and a worked example that reconciles both to the same price, see SDE vs EBITDA: which earnings number should a buyer actually use.
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, normalized to what it would cost to replace the role.
- One-time, non-recurring costs, such as a lawsuit, a relocation, or a failed product line.
- Discretionary personal expenses run through the business, such as a personal vehicle, travel, or family on payroll who do not work.
- Non-operating items, meaning 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, and the more durable and transferable it is, 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.