Business Valuation Guide — How to Value a Small Business or Startup

Asset-Based Valuation

The asset approach values a business as the sum of its parts. You calculate the fair market value of all business assets (equipment, inventory, real estate, vehicles, intellectual property, accounts receivable) and subtract liabilities (loans, accounts payable, accrued expenses). Book value: The simplest method — assets minus liabilities from the balance sheet. Book value is rarely accurate because assets are recorded at historical cost minus depreciation, which may not reflect current market value. A 10-year-old delivery truck might be on the books at $5,000 but worth $15,000. Adjusted book value: Adjust each asset to its current fair market value. Real estate is appraised. Equipment is valued at current resale. Inventory is valued at what it would sell for (not what it cost). Intangible assets (brand, customer list, website) are valued based on replacement cost or income they generate. Liquidation value: What the business would fetch if sold in a forced sale (typically 20-50% of fair market value). Used for distressed businesses, bankruptcy scenarios, or as a floor for negotiations. Best for: Asset-heavy businesses (construction companies, manufacturers, transportation companies, Hotels). Businesses with significant real estate or equipment. Not useful for service businesses or tech companies where the primary value is in people, relationships, and intellectual property. Understanding the balance sheet for valuation →

Market Approach — SDE and EBITDA Multiples

The market approach values a business based on what comparable businesses have sold for. In the small business market, the two standard metrics are SDE and EBITDA. Seller's Discretionary Earnings (SDE): Net profit plus owner's salary, benefits, and discretionary expenses (a car, meals, travel, family members on payroll). SDE represents the total financial benefit a single full-time owner-operator can expect from the business. Typical SDE multiples by business type: service businesses (1.5-3.0x SDE), construction and trades (1.5-2.5x), ecommerce and online businesses (2.0-3.5x), manufacturing (1.5-3.0x), restaurants (1.5-2.5x). A business with $200,000 SDE in the service industry is worth $300,000-600,000. EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. Used for larger businesses ($1M+ in profit) where the owner is not involved in day-to-day operations. Typical EBITDA multiples: small businesses under $5M EBITDA (3-5x), mid-market $5-50M EBITDA (5-8x), large businesses $50M+ EBITDA (8-15x). Industry-specific multiples: Software/SaaS (3-8x EBITDA or 3-10x ARR), healthcare (4-8x EBITDA), manufacturing (4-7x EBITDA), retail (2-4x EBITDA). A SaaS company with $2M EBITDA and 7x multiple is worth $14M. A retail store with $500K EBITDA and 3x multiple is worth $1.5M. Rules of thumb: In addition to formal multiples, many industries have quick valuation rules. A dental practice: 60-80% of annual revenue. A staffing agency: 30-50% of annual gross profit. A convenience store: inventory plus 1-3x EBITDA (since inventory is a major balance sheet item). These rules are starting points — the actual price depends on growth rate, customer concentration, facility condition, and market demand. Negotiating a purchase price based on valuation →

Income Approach — Discounted Cash Flow (DCF)

The income approach values a business based on the present value of its future cash flows. DCF is the most theoretically rigorous method but requires more assumptions than the market approach. Steps: Project future cash flows for 5-10 years (use historical data, growth trends, and industry forecasts), estimate a terminal value (the value of the business at the end of the projection period, typically 8-12x terminal year EBITDA), and discount all future cash flows back to present value using a discount rate that reflects the risk of the investment. Discount rate: For small businesses, discount rates typically range from 15-35% (compared to 8-12% for large public companies). The higher rate reflects the higher risk: customer concentration, owner dependence, lack of diversification, and limited access to capital. A business with a diversified customer base, strong management team, and long-term contracts deserves a lower discount rate. A business dependent on one owner and one large customer deserves a much higher rate. Example: A business generates $200K in annual free cash flow, growing at 5% per year. Terminal value: 8x terminal year EBITDA. Discount rate: 20%. The DCF valuation might be approximately $1.2-1.6M, depending on the exact assumptions. Limitations of DCF for small businesses: The output is highly sensitive to assumptions (changing the discount rate from 20% to 25% can change the valuation by 30%+). Future cash flows of small businesses are inherently unpredictable. Most small business buyers use the market approach (SDE/EBITDA multiples) for the primary valuation and DCF as a sanity check. Understanding cash flow drivers →

Valuing Pre-Revenue Startups

Startups with no revenue are the hardest to value. Without financial history, valuation depends on qualitative factors and market comparables. Methods used: Berkus Method — assigns value to five risk-reduction factors (sound idea: $500K, prototype: $500K, quality management: $500K, strategic relationships: $500K, product rollout/sales: $500K). Maximum valuation: $2.5M pre-money. Scorecard Method — compares the startup to the average venture-backed startup in the region and adjusts for team, opportunity, product, market, and other factors. Typical pre-seed valuations for US startups: $3-6M pre-money. What investors actually pay: Pre-seed: $3-6M pre-money valuation on a $1-2M raise. Seed: $8-15M pre-money. Series A: $20-50M pre-money (requires $1-3M in ARR typically). These numbers vary enormously by sector (AI startups command higher multiples) and geography (Silicon Valley valuations are 2-3x those in the Midwest). Convertible notes and SAFEs: Many early-stage investments use convertible notes or SAFEs rather than priced rounds. These defer the valuation discussion until the next funding round. The note converts at a discount (typically 15-25%) or with a valuation cap ($5-15M). This lets the startup and investor agree on terms now and negotiate valuation later when more information is available. Understanding the full startup funding lifecycle →

FAQs

What is the difference between SDE and EBITDA?

SDE (Seller's Discretionary Earnings) adds back the owner's salary, benefits, and discretionary expenses to net profit. It reflects earnings available to a single full-time owner-operator. EBITDA is net profit before interest, taxes, depreciation, and amortization. It reflects the operating performance of the business independent of the owner. SDE is used for businesses under $5M in revenue where the owner works in the business. EBITDA is used for larger businesses with professional management.

What multiple should I use for my business?

Multiples depend on industry, size, growth rate, customer concentration, and market conditions. General ranges: service businesses (1.5-3x SDE), construction (1.5-2.5x SDE), ecommerce (2-3.5x SDE), restaurants (1.5-2.5x SDE), SaaS (3-8x EBITDA), manufacturing (3-6x EBITDA), healthcare (4-8x EBITDA). Within each range, higher multiples go to businesses with: growing revenue, diversified customer base (no single customer >10% of revenue), strong management team, proprietary technology or IP, and long-term contracts or recurring revenue.

How do I value a business with no profit?

Unprofitable businesses are valued on revenue, user metrics, or asset value. Ecommerce businesses with $1M revenue and no profit might sell for 0.3-0.5x revenue ($300,000-500,000). SaaS startups with high growth but no profit are valued on ARR (annual recurring revenue) at 3-10x ARR depending on growth rate. Asset-heavy unprofitable businesses are valued at adjusted book value or liquidation value. If a business has no profit and no unique assets, it may have minimal or negative value.

How do I verify a seller's financial claims?

Request 3-5 years of tax returns (Form 1120 for C-Corps, 1065 for partnerships, Schedule C for sole proprietorships), profit and loss statements, balance sheets, bank statements (verify revenue deposits), credit card processing statements (for retail/ecommerce businesses), and customer invoices. Look for inconsistencies: reported revenue on tax returns vs bank deposits vs P&L statements. If the seller refuses to share tax returns, consider it a major red flag. Hire a CPA for buy-side due diligence on any deal over $100,000.

Should I use a business broker or value it myself?

For deals under $500,000, you can do preliminary valuation yourself using the methods in this guide. For larger deals, hire a Certified Business Appraiser (CBA) or Accredited Senior Appraiser (ASA) — the $5,000-15,000 cost is worth the accuracy and credibility. A broker's opinion of value is not a formal appraisal; brokers are motivated to close deals, not to give conservative valuations. Always get your own independent valuation, not the seller's.