How to Calculate Business Valuation Step by Step
3 min read
Contents:
- Quick Answer Box
- Brief Intro
- Preparation
- Step 1: Calculate Seller’s Discretionary Earnings
- Step 2: Choose an Appropriate Multiple
- Step 3: Adjust for Assets and Liabilities
- Step 4: Compare Against Market Data
- A Personal Example
- Include a Sustainability or Eco-Friendly Angle
- Pro Tips
- What the Pros Know
- Next Steps
- FAQ
- Is SDE or EBITDA better for small business valuation?
- Do I need a professional appraiser?
- How much does professional business valuation cost?
- Common Valuation Mistakes
- Updating Valuation Periodically
- DIY Versus Professional Valuation
Not knowing what a business is actually worth causes more failed sales negotiations than almost any other single factor entrepreneurs encounter.
Quick Answer Box
Business valuation typically multiplies annual earnings, often EBITDA or SDE, by an industry-appropriate multiple, then adjusts for assets, debts, and growth trends.
Brief Intro
Whether preparing to sell, seeking investment, or simply understanding your company’s worth, a clear valuation method removes guesswork from an important decision.
Preparation
Gather three years of financial statements, a list of business assets and liabilities, and research on comparable sales within your specific industry.
Step 1: Calculate Seller’s Discretionary Earnings
Add back owner salary, personal expenses, and one-time costs to net income, revealing the business’s true underlying earning power for a buyer.
Step 2: Choose an Appropriate Multiple
Small businesses typically sell for two to four times SDE, though multiples vary significantly by industry, growth rate, and customer concentration risk.
Step 3: Adjust for Assets and Liabilities
Add the value of owned equipment or real estate, then subtract outstanding debts, to arrive at a more complete valuation figure.
Step 4: Compare Against Market Data
Cross-check your calculation against recent comparable business sales, using resources like BizBuySell’s market data, to sanity-check your final estimate.
A Personal Example
A landscaping company owner calculated $180,000 in SDE, applied a 2.5x multiple, and arrived at a $450,000 asking price validated by comparable sales.
Include a Sustainability or Eco-Friendly Angle
Businesses demonstrating efficient resource use and sustainable practices increasingly command slightly higher multiples as buyers factor in long-term operating costs.
Pro Tips

What the Pros Know
Professional appraisers often weight multiple valuation methods together rather than relying on a single multiple, producing a more defensible final number.
Next Steps
Once you have a working valuation figure, revisit it as revenue and profitability change, treating the number as a living estimate rather than fixed.
FAQ
Is SDE or EBITDA better for small business valuation?
SDE works better for owner-operated small businesses, while EBITDA suits larger companies with professional management already in place.
Do I need a professional appraiser?
For significant transactions, yes; a certified appraiser provides a defensible, third-party valuation that both buyers and lenders trust more readily.
How much does professional business valuation cost?
Professional valuations typically cost $3,000-$15,000 depending on business complexity, size, and the depth of analysis required.
Common Valuation Mistakes
Overestimating value by ignoring customer concentration risk or outdated equipment often leads sellers to price their business unrealistically high initially.
Updating Valuation Periodically
Revisiting your valuation annually, rather than only when preparing to sell, helps track genuine business growth and informs strategic decisions.
DIY Versus Professional Valuation
A DIY estimate works fine for internal planning, but formal transactions typically warrant professional appraisal for added credibility and defensibility.