How Business Valuation Works
Business valuation determines what a buyer would reasonably pay for your company. There is no single “correct” number. Instead, valuators use multiple methods and look at where the estimates converge. A business worth $2M by earnings multiple and $2.3M by DCF likely falls in that range. A $5M gap between methods means you need more data or a professional opinion.
Every method starts from your financials—revenue, profit, assets, growth—but weights them differently. Earnings-based methods dominate small business sales. Revenue multiples drive SaaS and tech acquisitions. DCF matters most for high-growth companies. Asset-based valuation sets the floor: what the pieces are worth if you liquidate tomorrow.
The Four Valuation Methods Explained
Earnings Multiple (SDE/EBITDA): Take your annual profit (seller's discretionary earnings or EBITDA) and multiply by an industry factor. A restaurant earning $150K/year at a 4x multiple is worth $600K. This is the most common method for businesses under $5M in revenue because profit is what the buyer actually takes home.
Revenue Multiple: Multiply annual revenue by an industry factor. SaaS companies trade at 5–10x revenue because recurring revenue is predictable. Restaurants trade at 0.3–0.5x because margins are thin and revenue is volatile. Revenue multiples are useful when a business is growing fast but not yet highly profitable.
Discounted Cash Flow (DCF): Project future cash flows for five years, then calculate what those future dollars are worth today using a discount rate (typically 10–15% for small businesses). Add a terminal value for everything beyond year five. DCF captures growth trajectory better than snapshot methods but is sensitive to assumptions about growth rates and discount rates.
Asset-Based: Total assets minus total liabilities equals book value. This is the liquidation floor—what you'd get by selling everything and paying off debts. It undervalues most operating businesses because it ignores earning power, brand value, and customer relationships. It's most relevant for asset-heavy businesses like real estate, manufacturing, and construction.
Industry Valuation Multiples: What Buyers Pay
| Industry | Earnings Multiple | Revenue Multiple | Example ($200K Profit) |
|---|---|---|---|
| SaaS | 20–30x | 6–10x | $4M–$6M |
| Technology | 15–25x | 3–7x | $3M–$5M |
| E-Commerce | 12–18x | 1.5–3x | $2.4M–$3.6M |
| Healthcare | 8–15x | 1.5–3x | $1.6M–$3M |
| Professional Services | 5–10x | 1–2x | $1M–$2M |
| Consulting | 4–8x | 1–2x | $800K–$1.6M |
| Retail | 5–10x | 0.3–0.7x | $1M–$2M |
| Manufacturing | 5–10x | 0.7–1.5x | $1M–$2M |
| Restaurant | 3–5x | 0.3–0.7x | $600K–$1M |
| Construction | 4–8x | 0.3–0.7x | $800K–$1.6M |
Multiples are simplified industry averages for small-to-mid-size businesses. Actual multiples vary based on growth rate, profitability, customer concentration, recurring revenue mix, and market conditions. Data reflects 2024–2025 transaction ranges.
What Increases (and Decreases) Your Multiple
Higher multiples: Recurring revenue (subscriptions, contracts), high growth rates (20%+ annually), low customer concentration (no single client over 15% of revenue), strong brand or IP, owner-independent operations, and long operating history (10+ years).
Lower multiples: Declining revenue, owner-dependent operations (you are the business), high customer concentration, thin margins, regulatory risk, and businesses under three years old. A business that can't run without the founder sells for 30–50% less than one with a management team in place.
When to Get a Professional Business Valuation
Use this calculator for a quick ballpark estimate. Get a certified valuation analyst (CVA) or accredited senior appraiser (ASA) when real money is on the table: selling the business, buying out a partner, estate or gift tax planning, divorce proceedings, shareholder disputes, or ESOP establishment. A formal valuation costs $3,000–$15,000 depending on business size and complexity, but it produces a defensible report that holds up in court and negotiations.
The IRS requires a qualified appraisal for gift and estate tax purposes when a business interest exceeds $5,000. Courts in divorce cases generally accept only formal valuations, not calculator estimates. If the decision hinges on the number, pay for the real thing.
To calculate your profit margins before valuing the business, use the profit sharing calculator. To find your break-even point and understand when your revenue covers all costs, try the break-even calculator.