When you’ve built your own business from scratch, it’s hard to be objective about how much it’s all worth. After all, you’ve poured so much of yourself into it. Business valuation tells you how much your business is worth in dollars (as opposed to blood, sweat, and tears).
Valuing your small business gives you hard numbers—information you can use to sell your company, start succession planning, or court investors and lenders. In this article, we’ll show you how to determine the value of your small business.
Three methods to determine the value of your business
When it’s time to put a price on your business, you have three main methods to choose from. We’ll order them from simplest to most sophisticated:
Book value is your net worth: your assets, minus your liabilities, as recorded on your balance sheet. This is the most straightforward way to value your business. Not to be confused with liquidation value, which is what your assets would bring in a quick, forced sale.
Present value estimates what your business is worth today based on the earnings or cash flow it’s expected to produce in the years ahead, adjusted for the time value of money. It’s useful when you want to know the value of your business now, as well as what it may be worth in the future. Present value determines whether your business is a “going concern”—a term for a business that has the stability to continue to operate and earn.
Fair market value takes into account a number of factors, including the health of your industry, to put a price on your business—the price a willing buyer and a willing seller would agree on, with neither under pressure to act. If you’re selling, this is the number potential buyers want to see.
The three standard valuation approaches
Professional appraisers group valuation methods into three standard approaches. The three methods above fit into them like this:
Asset-based approach: Values your business based on what it owns minus what it owes. Book value is the simplest version. The adjusted net asset method, covered below, is a more precise one.
Income approach: Values your business based on what it’s expected to earn. Present value falls into this category, using methods like discounted cash flow (DCF) and capitalization of earnings.
Market approach: Values your business by comparing it to similar businesses that have recently sold. Fair market value usually leans on this approach, using comparable sales and industry multipliers.
Appraisers often use more than one approach and compare the results. Which one carries the most weight depends on your business. Asset-based valuation suits asset-heavy companies, while income and market approaches suit businesses that make their money from earnings.
Calculating book value for your business
Book value is easy to find. You can use your balance sheet to determine your net worth.
This is when good bookkeeping comes into play. If you don’t have accurate financial records, including an up-to-date balance sheet for your business—not to mention an income statement (which shows your net income) and a cash flow statement—understanding the value of your business is close to impossible.
Remember, your book value consists of all your assets, minus liabilities.
Assets include cash, accounts receivable, inventory, equipment, real estate, and intangible property like intellectual property (copyrights, trademarks, and patents). Retained earnings and investors’ equity aren’t assets—they’re part of owner’s equity, which is what’s left when you subtract liabilities from assets.
Liabilities include accounts payable (money you owe vendors and contractors) and debt owed to the bank or the IRS.
Book value is great for getting a ballpark figure, but if you’re serious about selling your business, you’ll need to find your fair market value or, at the very least, your present value.
A more precise asset-based approach: the adjusted net asset method
The adjusted net asset method (also called adjusted book value) goes a step further than book value. Instead of relying on the amounts on your books, you restate your assets and liabilities at their current fair market values. Equipment may be worth more or less than its depreciated book value, real estate may have appreciated, and intangible assets like copyrights, trademarks, and customer lists may not appear on your balance sheet at all.
This kind of asset-based valuation works best for asset-heavy businesses, such as real estate holding companies or manufacturers, and for businesses that are winding down. It tends to undervalue businesses that earn most of their income from people, relationships, or reputation.
Calculating your business’s present value
Present value takes into account what your business is earning now, as well as what you can expect it to earn in the future.
When we talk about earnings, we mean seller’s discretionary earnings (SDE). This is an important number—more on that in a minute. SDE works best for small, owner-operated businesses. Larger businesses are usually valued on earnings before interest, taxes, depreciation, and amortization (EBITDA) instead.
Once you’ve got your present SDE, you can work with your accountant or a business valuation expert to create financial projections, and figure out what your business’s SDE will be in the future, based on past trends. They’ll then discount those projected earnings back to today’s dollars to arrive at present value. (This is another case when up-to-date bookkeeping is essential.)
Discounted cash flow (DCF): valuing future cash flow
The most common way to calculate present value is discounted cash flow (DCF), part of the income approach. A dollar you’ll earn five years from now is worth less than a dollar today, because you could invest today’s dollar in the meantime, and because future earnings are never guaranteed. DCF accounts for that by projecting your business’s future cash flow, then discounting each year’s amount back to today’s dollars.
Value = Year 1 cash flow ÷ (1 + r) + Year 2 cash flow ÷ (1 + r)^2 + … + terminal value ÷ (1 + r)^n
In the formula, r is the discount rate, n is the last year you forecast, and the terminal value is what the business is expected to be worth at the end of the forecast period.
The discount rate is the annual return a buyer or investor would require to take on the risk of owning your business. The riskier the business—say, one that depends heavily on the owner or on a handful of customers—the higher the discount rate and the lower the value. Your forecasts also depend on your growth potential, so be realistic. DCF values can swing widely with small changes in growth and discount rate assumptions, which is a good reason to build your projections with your CPA.
Capitalization of earnings
Capitalization of earnings is a simpler income-approach method that suits stable businesses whose earnings aren’t changing much. Instead of forecasting every year, you divide one year’s normalized earnings by a capitalization rate (cap rate):
Value = Annual earnings ÷ Cap rate
The cap rate is closely related to the discount rate: it’s the discount rate minus the expected long-term growth rate of the business’s earnings. It also works like a buyer’s return on investment (ROI). A 25% cap rate means a buyer expects to earn back about 25% of the purchase price each year. A higher cap rate means more risk and a lower value. A lower cap rate means less risk, or higher expected growth, and a higher value.
For example, if your business has $100,000 in normalized annual earnings and an appraiser uses a 25% cap rate, the value is 400,000(100,000 ÷ 0.25). That’s the same as applying a 4x multiple, since a multiple is simply 1 ÷ the cap rate.
Calculating seller’s discretionary earnings (SDE)
When you own a business, you tend to create expenses for it. One of those expenses is your owner’s draw or salary—how much you pay yourself from the business accounts. You may also run personal or one-time expenses through the business, like a vehicle, a family member’s phone plan, or a legal settlement.
When someone buys your business, they don’t buy you with it. They want to know the value of the business alone, regardless of the impact an owner might have on it.
Your SDE is what your business earns before taxes, interest, and depreciation, plus one owner’s full compensation and any one-time or personal expenses run through the business. In other words, it’s roughly what a single owner-operator could expect to take home.
The SDE formula:
SDE = Net earnings before taxes + interest + depreciation and amortization + one owner’s compensation (salary or draw, benefits, and payroll taxes) + discretionary and non-recurring expenses
Here’s how to do it, step by step:
Find your business’s net earnings for the year, before taxes.
Add back interest expense, depreciation, and amortization.
Add the amount you paid yourself (salary or draw, plus owner benefits and the employer’s share of payroll taxes). Only add back one full-time owner’s compensation.
Add all discretionary and non-recurring expenses you incurred. These are personal or one-time costs a new owner wouldn’t need to repeat—such as a personal vehicle, a one-time legal settlement, or a family member’s non-working salary. Do not include cost of goods sold (COGS). Keep documentation for each add-back, since buyers and lenders may reject ones that look like regular operating costs. (We’ll walk you through essential vs. non-essential expenses in more detail below.)
Essential vs. non-essential expenses
Essential expenses are fixed. They keep your business running, and they’re the same each month. For example:
Rent and property taxes
Business insurance
Utilities
Non-essential expenses are ones a new owner could cut or wouldn’t repeat, such as personal costs run through the business or one-off events. For example:
Personal travel and meals (not client-facing or necessary business travel)
One-time equipment purchases or upgrades (routine repairs are a normal operating cost)
Staff events that won’t recur
One-time legal or consulting fees
Calculating your business’s fair market value
Your fair market value is the price you can reasonably expect to get if you sell your business on the open market. To find it, you multiply your SDE by an industry multiplier, also called an “SDE multiplier.” Small businesses commonly sell for roughly 2 to 4 times SDE, but the range varies widely by industry and size.
Understanding industry multipliers
Industry multipliers reflect what similar businesses have actually sold for, and appraisers adjust them to fit your business. They take a lot of factors into account:
The size of your business
Trends in your market
Your industry
Your tangible assets (real estate, equipment, cash) and your intangible assets (client list, intellectual property)
How much of your business’s success depends upon your individual skills or reputation
Other variables
Why use an industry multiplier?
In order to get a fair market value for your business, why can’t you just use your SDE, or your SDE plus some financial projections?
Your SDE is good for knowing how much your business can be expected to bring in each year. But it doesn’t take into account other factors—including the state of the market and your industry more broadly. Those factors are expressed in the multiplier.
Here’s an example. Let’s say you own two businesses. One sells screen replacement kits for the latest model of iPhone. The other makes typewriter ribbons.
As chance would have it, both companies have identical SDEs. So, which one is worth more to buyers?
The market for typewriter ribbons is not growing; if anything, it’s shrinking. Meanwhile, as more people buy the new iPhone, and more manage to crack their screens, your market will grow.
The industry multiplier for your screen replacement kit business will be higher than the one for your typewriter ribbon business—because the people who set the multiplier take those factors into account.
Who sets the multiplier?
If you hire a consultant or appraiser to help put a price on your business, they’ll determine a multiplier—and they should be able to walk you through how they determine it.
If you’re valuing your business on your own, you’ll need to get a predetermined industry multiplier from a third party. Firms that specialize in determining business values publish guides containing lists of industry multipliers. You’ll have to pay for the latest edition. Get started by checking out the 2026 Business Reference Guide from Business Valuation Resources, which also offers an online version updated throughout the year.
Business valuation services
Appraising your own business eats up a lot of time and energy. If you’re interested in getting your business on the market ASAP, your best bet is to hire an appraiser.
An appraiser uses knowledge of different industries and the economy as a whole to determine your company’s value. An appraiser may be able to find a more accurate number than you would alone.
Keep in mind: Not all business appraisers are created equal. Make sure anyone you hire has one or more of the following credentials:
ABV (Accredited in Business Valuation): A credential for Certified Public Accountants who have met AICPA requirements for business valuation experience and education, and passed an exam.
ASA (Accredited Senior Appraiser): Awarded by the American Society of Appraisers to appraisers who complete coursework and exams, have several years of full-time valuation experience, and submit a report for peer review.
CBA (Certified Business Appraiser): A credential from the Institute of Business Appraisers that requires coursework, an exam, and demonstrated appraisal experience.
CVA (Certified Valuation Analyst): A credential from NACVA for valuation professionals who complete training and pass an exam.
CBI (Certified Business Intermediary): Awarded by the International Business Brokers Association to business brokers who know how to buy and sell businesses. This is a brokerage credential, not a valuation credential, so look for it alongside one of the credentials above.
When it comes to valuing your business, there’s a lot of money—perhaps your entire livelihood—on the line. Double-check an appraiser’s credentials before you decide to work with them.
Your business valuation checklist
If you go to an appraiser for help, be sure to have the following on hand:
Financial statements for the previous three years
Details about major assets
Details about major liabilities, including business loans
Details about investors
Your business plan
Any financial projections you’ve already created
Past and present budgets
List of staff members, their qualifications, and their compensation
List of competitors
Customer or client list
List of vendors and regular contractors
Before showing up to an appointment with your appraiser, check in advance to find out whether any extra information will be needed.
FAQs
How much does a business valuation cost?
Costs vary with the size and complexity of your business and the type of report you need. A basic valuation for a small business often runs a few thousand dollars, and formal reports for legal, tax, or sale purposes can cost more. Ask any appraiser for a written quote and what's included before you hire them.
How often should you value your business?
Many owners review their value once a year and get a formal valuation when something major happens, such as selling, bringing in a partner or investor, applying for financing, or planning for succession or estate matters. Regular check-ins also help you see how changes in earnings or risk are affecting your value.
What's the difference between SDE and EBITDA?
Both measure earnings, but they treat the owner differently. SDE adds back one owner's full compensation, so it shows what a single owner-operator could take home. EBITDA generally doesn't add back the owner's pay, which makes it a better fit for larger businesses that run with a management team.
What makes a small business worth more or less?
Steady, growing earnings, a loyal and varied customer base, clean financial records, and a business that can run without you tend to raise value. Heavy dependence on the owner or a few customers, declining industry trends, and messy books tend to lower it.
How do you value a business that isn't very profitable?
Without much profit, earnings-based methods may not work well. Appraisers often lean on the asset-based approach, which values what the business owns minus what it owes, or on revenue-based comparisons to similar businesses that sold. Strong assets, customers, or growth potential can still support a meaningful value.
Quick note: This is not to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.
