What's My Business Worth?
There isn't a universal formula for valuing a business, but there is a consistent framework. This guide explains how buyers calculate value, what drives the multiple, and why two similar businesses can receive very different valuations.
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 real assessment, the same business ranged from 2.4x sold today to 6.0x after preparation on identical earnings. The difference wasn't profit; it was buyer confidence.
Enterprise value is not what you take home
Enterprise value is only the starting point. Debt, working capital, taxes, earnouts, and deal structure all affect what you actually take home. Two identical valuations can produce very different 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.
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.