What's My Business Worth?

The valuation formula buyers actually use

Nearly every private business transaction in the lower middle market comes down to one piece of math: normalized earnings times a multiple equals enterprise value. A business producing $2M in Adjusted EBITDA at a 5x multiple implies a $10M enterprise value.

Buyers don't simply accept your reported earnings or apply an industry average. They normalize earnings, adjust the multiple for risk, and value the business accordingly.

What counts as earnings: SDE vs EBITDA

Adjusted EBITDA is used for larger businesses bought by companies or investors. It does not add back a market-rate salary for the owner's role, because the buyer must pay a manager to do that job.

SDE (Seller's Discretionary Earnings) is used for smaller owner-operated businesses. It adds the owner's salary and personal benefits back into profit, because a new owner-operator could expect to earn all of it.

Around the low seven figures of earnings, buyers typically shift from SDE to EBITDA. Which lens applies, and which add-backs survive scrutiny, can materially change value.

What moves the multiple up or down

Two businesses with identical EBITDA can trade at very different multiples. The difference is risk and transferability:

• Size. Bigger, steadier earnings attract more buyers. The same industry can trade at 3x at one scale and 7x at another.
• Growth. Faster growth typically earns a higher multiple.
• Recurring revenue. Buyers place a premium on revenue that's contracted or highly predictable.
• Customer concentration. Revenue tied to a handful of customers increases buyer risk.
• Owner dependence. Buyers pay more for businesses that operate without the owner.
• Financial quality. Reliable financials reduce uncertainty and increase buyer confidence.
• Buyer type. Different buyers value the same business differently.

Why owners overestimate, and by how much

Most owners anchor on revenue, their best year, or an industry rule of thumb. Buyers value normalized earnings and risk instead, which often leads to a very different number.

In one anonymized assessment of a site and utility contractor with ~$25M in revenue and ~$5M in adjusted EBITDA, the same earnings supported an as-is estimate of about $12M (2.4x), a focused-preparation estimate of about $24.5M (4.9x), and a best-case estimate of about $30M (6.0x). The assessment attributed the gap to owner dependence, customer concentration, and the quality of contracted revenue—not to a change in earnings. These were contextual scenarios from one assessment, not guaranteed outcomes or a promise of transaction price.

Enterprise value is not what you take home

Enterprise value is only the starting point. For a simplified bridge, an $8M enterprise value minus $2M of debt plus $500,000 of excess cash equals $6.5M of equity value before taxes and transaction costs. The actual closing statement can also reflect normalized working capital, debt-like items, escrow or holdbacks, rollover equity, earnouts, and other negotiated terms; equity value is not the same as cash at close or after-tax proceeds.

How to get a real number for your business

You can estimate the math yourself: normalize earnings, choose an appropriate multiple, and adjust for your business's risks. The difficult part is remaining objective.

Start with FastTrak, our free valuation diagnostic. You'll receive a personalized valuation range, buyer risk assessment, and GO / FIX / WAIT recommendation. When you're ready to improve that value, ExitClarity Pro helps you measure and strengthen it over time.

Normalize earnings before applying a multiple

Normalization starts with reported profit and asks what a buyer can reasonably expect the business to earn under new ownership. Reconcile the financial statements to tax returns and source records, isolate genuinely non-recurring items, and use a market-rate replacement cost for work the owner performs. For a smaller owner-operated company, SDE may add back one working owner's compensation and benefits; EBITDA generally retains a market-rate cost for replacing the owner's role.

An add-back is not valid simply because an owner calls it personal or unusual. A defensible adjustment is specific, supported, non-recurring or owner-specific, and does not remove a cost the next owner must incur. Do not count the same expense twice, add back ordinary operating costs, or treat below-market owner pay as a benefit without including the replacement cost.

• Usually worth testing. A documented, one-time transaction or relocation cost that will not recur under a buyer.
• Needs careful evidence. Owner or family compensation above market, personal expenses charged to the company, and unusual professional fees. Support each item and account for replacement labor where needed.
• Usually not an add-back. Recurring repairs, routine recruiting, ordinary legal or consulting work, and expenses that continue after closing simply because the owner labels them discretionary.

Which valuation method fits my business?

Buyers may compare several methods; no method is a guarantee or a substitute for market evidence. The final transaction price also depends on buyer competition, financing, diligence findings, and the terms a seller is willing to accept.

• EBITDA multiple. Common for established, larger businesses with professional management; applies a risk-adjusted multiple to normalized EBITDA while retaining a market-rate cost for the owner's role.
• SDE. Often useful for smaller owner-operated businesses where one working owner's compensation and benefits are part of the return available to a buyer-operator. It is not interchangeable with EBITDA.
• Revenue multiple. A rough screening measure in some sectors with comparable revenue models; it can obscure margin, cash conversion, and customer-quality differences and should not stand alone.
• Asset-based value. Values assets less liabilities and may be informative for asset-heavy, holding, or distressed businesses. It can miss the value of a profitable going concern's earnings and intangible assets.

Pressure-test three years of records and every add-back

Prepare three years of annual financial statements and tax returns, plus current year-to-date monthly results. Reconcile revenue, gross margin, payroll, owner compensation, and cash flow across them; explain unusual swings and separate durable trends from a peak year, one-time contract, or temporary market condition. A buyer may weight recent periods or build a run-rate view, but will test the evidence rather than accept a single favorable year.

Keep an add-back schedule tied to invoices, payroll records, bank statements, contracts, and general-ledger detail. For each adjustment, record the amount, period, business purpose, why it will not recur or is owner-specific, and any replacement cost. A quality-of-earnings review is an independent reconstruction of sustainable earnings from source records; it is not an audit, and it may reject adjustments that are unsupported or ordinary costs of operating the business.

What buyers check—and how terms change proceeds

A buyer's checklist follows the risks behind the multiple: earnings quality and add-back support; customer and supplier concentration; written contract terms and renewal patterns; leadership and owner dependence; documented processes; working-capital needs; and liabilities, leases, and other debt-like items. Clear answers make it easier to distinguish durable earnings from risks that may change price or structure.

A headline price is only one part of an offer. Compare cash at close with any earnout, seller note, rollover equity, escrow, or holdback. For contingent consideration, understand the measurement period and formula, who controls decisions that affect the metric, what happens if the buyer changes operations, and how disputes are resolved. Review the working-capital peg and its accounting definitions as well as the price. These terms shift risk and timing; they do not guarantee that the headline amount will be received.

• Can a buyer verify the last three years of results and trace proposed add-backs to source documents?
• What share of revenue depends on the largest customers, key contracts, or the owner's personal relationships?
• Who can run operations and retain customers if the owner steps away after an agreed transition?
• How much is cash at close, and what is contingent on an earnout, seller financing, rollover, escrow, or working-capital adjustment?

Frequently Asked Questions

How do I calculate what my business is worth?

Start with your normalized earnings, then apply a market multiple based on your size, industry, growth, and risk. Buyers then adjust that number based on factors like recurring revenue, customer concentration, financial quality, and owner dependence.

What is the rule of thumb for valuing a business?

A common rule of thumb is 3x to 8x Adjusted EBITDA for many lower middle market businesses, or 2x to 4x SDE for smaller owner-operated companies. These are only starting points; your actual multiple depends on your business's specific risk profile.

How much is a business worth with $1 million in profit?

Roughly $3M to $8M in enterprise value, depending on the multiple your business supports. Factors like recurring revenue, customer diversification, growth, and owner independence determine where you fall within that range.

Is a business valued on revenue or profit?

Buyers primarily value normalized earnings, not revenue. A $10M revenue business with 8% margins is worth less than a $6M revenue business with 20% margins, because the second produces more durable profit.

How can I find out what my business is worth for free?

ExitClarity's free FastTrak diagnostic estimates your business's current valuation range using your financials, industry, and key value drivers. You'll also receive an 11-category risk assessment and personalized recommendations. While it's not a formal appraisal, it provides a practical estimate of what buyers are likely to pay today.

How do I increase the value of my business before selling?

Increase value by reducing buyer risk. That typically means making the business less dependent on the owner, strengthening recurring revenue, diversifying customers, improving financial quality, and building a consistent growth story. These improvements usually take time, which is why preparing well before a sale matters.

Why is my business worth less than I expected?

Most owners anchor on revenue, their best year, or a rule-of-thumb multiple. Buyers focus on normalized earnings, transferability, and risk instead. The gap between those perspectives is often where valuation expectations diverge.

When should I get a business valuation?

Start several years before a planned sale—often three to five years when possible—so there is time to improve financial quality, reduce owner dependence, and address customer concentration. If a sale is sooner, an early assessment can still clarify the likely range and the issues a buyer may diligence.