Business Valuation Methods: Which One Is Right for Your Business?

The Short Answer: A Decision Tree for Business Valuation Methods

Start here:

• Earnings under $1M, owner-operated -- Use SDE multiples
• Earnings $1M+, has (or could have) management -- Use EBITDA multiples
• High-growth or SaaS -- Use revenue multiples
• Asset-heavy (real estate, equipment-intensive) -- Use asset-based valuation
• Large, complex, or PE-backed -- Use discounted cash flow (DCF)

Most businesses under $5M use market multiples -- either SDE or EBITDA. The other methods matter for specific situations.

Method 1: Market Multiples Using SDE

When to Use It

SDE (seller's discretionary earnings) multiples are for owner-operated businesses under $1M in annual earnings. If the business depends on you being there every day, this is your method.

Most brokers use this. Individual buyers think in SDE.

How It Works

Start with net income. Add back everything specific to you: your salary, personal expenses run through the business, interest, taxes, depreciation, and one-time costs. Multiply by an industry-based factor.

  Net Income
+ Owner's salary and benefits
+ Interest, taxes, depreciation, amortization
+ Personal expenses through the business
+ One-time / non-recurring expenses
────────────────────────────────
= SDE

SDE × Multiple = Business Value

Typical SDE Multiples by Industry

Worked Example: $600K Revenue Service Business

A residential cleaning company with $600K in annual revenue:

At 2.5x (reasonable for home services with repeat customers):

SDE:      $183,000
Multiple: × 2.5
────────────────
Value:    $457,500

A new owner-operator pays $457K and expects to earn roughly $183K per year running it.

For more on how SDE compares to EBITDA, see SDE vs EBITDA: Which Metric Actually Values Your Business?

Method 2: Market Multiples Using EBITDA

When to Use It

EBITDA multiples are for businesses with $1M+ in earnings and some form of management team. If your business runs -- or could run -- without you there every day, this is your method.

PE firms, family offices, and strategic acquirers all think in EBITDA. Moving from SDE to EBITDA multiples is one of the biggest value levers you can pull.

How It Works

The key difference from SDE: EBITDA does not add back owner compensation. It assumes the business needs a paid manager.

  Net Income
+ Interest expense
+ Taxes
+ Depreciation
+ Amortization
+ Non-recurring adjustments
────────────────────────────────
= Adjusted EBITDA

Adjusted EBITDA × Multiple = Business Value

Typical EBITDA Multiples by Industry

Worked Example: $8M Revenue Manufacturing Company

A custom packaging manufacturer with $8M in annual revenue and a full management team:

At 6x (strong for manufacturing with long-term contracts and diversified customers):

EBITDA:   $1,270,000
Multiple: × 6.0
────────────────
Value:    $7,620,000

Higher multiple than SDE -- but EBITDA does not include owner compensation. The buyer is paying for cash flow after management costs.

Method 3: Revenue Multiples

When to Use It

Revenue multiples work when current earnings do not reflect the business's value. This is almost exclusively for high-growth companies -- typically SaaS or tech -- where the owner is reinvesting into growth instead of taking profits.

Typical Revenue Multiples

Multiples depend heavily on growth rate, churn, and retention. A SaaS company growing 80% YoY with 95% net retention gets a very different multiple than one growing 15% with 80% retention.

Worked Example: $2M ARR SaaS Company

A B2B project management tool with $2M in annual recurring revenue:

At 7x ARR (justified by strong growth and retention):

ARR:      $2,000,000
Multiple: × 7.0
────────────────
Value:    $14,000,000

This company might only have $200K in EBITDA because the founders are reinvesting everything into sales and product. An EBITDA-based valuation would dramatically understate its value.

Method 4: Asset-Based Valuation

When to Use It

Asset-based valuation is simple: what the business owns minus what it owes. Use it when the primary value is in physical assets, not earnings.

Common use cases:

• Real estate holding companies -- the properties are the value
• Equipment-heavy manufacturing -- specialized machinery, fleet vehicles
• Businesses being liquidated -- when the going concern value is less than asset value
• Natural resource companies -- timber, mining, agricultural land

How It Works

  Total Assets (at fair market value, not book value)
- Total Liabilities
────────────────────────────────
= Net Asset Value

The critical distinction: use fair market value, not depreciated book value. Equipment bought for $500K five years ago might be $50K on your books but $300K on the open market. An independent appraiser determines the fair market value of each significant asset.

Limitations

This method ignores earning power. A manufacturer with $3M in equipment and $1.5M in EBITDA is worth far more than its net assets. It only makes sense when assets drive the value -- or when the business is not profitable enough for an earnings-based valuation.

Most operating businesses use asset value as a floor: "At minimum, it is worth this much." Then they layer earnings on top.

Method 5: Discounted Cash Flow (DCF)

When to Use It

DCF projects future cash flows and discounts them back to today's value. It is the most theoretically rigorous method -- and the most complex.

Standard for:

• Larger businesses ($10M+ in revenue) where sophisticated buyers build financial models
• Private equity acquisitions where buyers need to calculate internal rate of return (IRR)
• Businesses with uneven cash flows -- seasonal businesses, project-based companies, or businesses with large capital expenditure cycles

How It Works (Simplified)

Year 1 Cash Flow / (1 + discount rate)^1
+ Year 2 Cash Flow / (1 + discount rate)^2
+ Year 3 Cash Flow / (1 + discount rate)^3
+ Year 4 Cash Flow / (1 + discount rate)^4
+ Year 5 Cash Flow / (1 + discount rate)^5
+ Terminal Value / (1 + discount rate)^5
────────────────────────────────
= Present Value of the Business

The discount rate reflects the buyer's required return and the risk involved. Small businesses: typically 20-30%. Established mid-market companies: 12-20%.

Why Most Small Businesses Do Not Need This

DCF requires reliable financial projections -- something most small businesses do not have. A five-year projection for a $2M services company involves so much guesswork that the result is not meaningfully more accurate than simple multiples.

Under $5M in revenue? Stick with market multiples. DCF adds complexity without adding precision.

Which Business Valuation Method Is Right for You?

The complete comparison:

For most private businesses between $500K and $50M in revenue, the answer is market multiples -- SDE or EBITDA. The other methods matter in specific circumstances but are not the starting point.

Why Your Valuation Method Matters for the Sale

Your valuation method determines which buyers take you seriously and how much they pay.

The wrong method repels the right buyers. Present SDE to a PE firm and they will translate it to EBITDA anyway -- often less favorably than if you had done it yourself. Present EBITDA to an individual buyer and they will wonder why earnings look so low (because EBITDA does not include your salary).

The wrong method leaves money on the table. Comps might show businesses like yours sell for 5x EBITDA. If you present using SDE and accept a 3x multiple, you just underpriced your business. The method frames the conversation, and the conversation frames the price.

Different methods attract different deal structures. SDE deals are typically all-cash or financed through programs like the Canada Small Business Financing Program (CSBFP) or SBA loans in the US. EBITDA deals often involve earnouts, seller notes, and equity rollovers. DCF deals come with detailed financial modeling and longer due diligence. Know which game you are playing.

Questions You Might Have

What is the most common business valuation method for small businesses?

SDE multiples. It calculates what one owner-operator takes home (seller's discretionary earnings) and multiplies it by 2x to 4x depending on industry, growth, and risk. This is what brokers and individual buyers use.

How many business valuation methods should I use?

One primary method, chosen by business size and type. Savvy sellers prepare two: one primary, one supporting. An SDE-based valuation backed by comparable transaction data gives buyers confidence that the price is grounded in market reality.

Can I use revenue multiples to value my business?

Only for high-growth businesses -- typically SaaS or tech -- where current profits do not reflect value because the owner is reinvesting heavily. For traditional businesses (services, manufacturing, retail), revenue multiples produce unreliable valuations. Those buyers care about earnings, not revenue.

What is the difference between fair market value and a business valuation?

Fair market value is the price a willing buyer and seller would agree on with reasonable knowledge of the facts. A business valuation estimates that price using one or more methods. The valuation gives you a range; the actual fair market value is determined during negotiation.

Do I need a professional business appraisal to sell my business?

Not always. Under $2M in value, most sellers work with a broker who provides a valuation as part of the listing process. Over $2M, or when tax, legal, or partnership disputes are involved, a formal appraisal from a Chartered Business Valuator (CBV) or Accredited Senior Appraiser (ASA) provides a defensible, independent opinion of value.

Next Step: Find Out Which Method Applies to Your Business

Now apply the right business valuation methods to your specific numbers.

Your valuation depends on more than the method -- industry multiples, growth trajectory, customer concentration, and dozens of other factors shift the multiple within the range. A $500K SDE landscaping business with 80% recurring revenue commands a very different multiple than one that depends on new project bids.

If you are thinking about selling your business in the next few years, knowing what it is worth today gives you time to close the gap between where you are and where you want to be.

The free valuation tool takes your revenue, industry, and business characteristics and gives you a range based on real market data. Two minutes, no email required.