How Much Can I Sell My Business For?

In plain English, estimating what a business could sell for follows the same five steps whatever the size of the company.

1. Determine normalized earnings. Rebuild what the business truly earns once one time and discretionary items are treated properly.
2. Determine which earnings measure applies. SDE for an owner operated business, EBITDA for a management led one.
3. Apply an appropriate valuation multiple. Supported by the characteristics of the business and market evidence, not by a rule of thumb.
4. Consider company specific strengths and risks. Customer mix, owner involvement, management depth, record quality.
5. Consider transaction specific adjustments. Debt, working capital, structure and terms all affect the amount an owner finally receives.

Which earnings measure applies is usually straightforward. If you work in or manage the business day to day, the relevant figure is normalized SDE, because the earnings include the benefit you personally take out. If the company runs largely through a management team paid at market rates, the relevant figure is normalized EBITDA, because the cost of running the company is already in the numbers.

Normalized SDE × SDE Multiple = Preliminary Business Value
or
Normalized EBITDA × EBITDA Multiple = Preliminary Enterprise Value

That formula is a starting point, not a valuation. Readers who want the full methodology behind it, including how earnings are normalized and how buyers assess risk, will find it in our guide to how business valuation works.

Many smaller owner operated businesses are evaluated on normalized Seller's Discretionary Earnings. SDE exists because reported net income rarely reflects what the business is actually producing for the person who owns it. The build up below shows the shape of that calculation.

Owners who want to learn and prepare at their own pace can get the free Business Valuation Preparation Guide further down this page.

Deciding what to sell for is a different question from what the business is worth. Three figures get used interchangeably in conversation and mean quite different things in a transaction.

Business value, asking price and final sale price are related, but they are not the same thing. An asking price set well above what the earnings support tends to lengthen time on market and attract fewer credible buyers. One set below it gives away value the business already earned. And the final price reflects structure as well as headline number: cash at closing, seller financing, earnouts, working capital and the treatment of debt all change what an owner actually keeps, and how the purchase price is allocated across assets also affects the tax treatment of a business sale reported to the IRS. Positioning a company deliberately at this stage is part of the broader work of selling a business.

Once normalized earnings are established, the remaining question is what a buyer is willing to pay for them. These are the factors that most often move that judgment.

The multiple is not determined by industry alone. Buyers also evaluate the quality, sustainability and transferability of the earnings they are acquiring.

Why comparable companies end up with different multiples is examined in more depth in valuation multiples explained.

Consider two hypothetical companies, each producing $500,000 of normalized earnings.

Both businesses may produce the same normalized earnings, but buyers may view Business A as more transferable and lower risk, which can support a stronger valuation multiple. Nothing in the profit and loss statement explains that difference. It comes entirely from how confident a buyer can be that the earnings continue once the owner is gone.

Owners usually describe their company by annual revenue, because it is the number they track most closely. Revenue describes volume. It does not tell a buyer how much economic benefit the business actually produces.

These figures are illustrative only and are not market averages. They simply show that identical revenue can sit above very different economics. Alongside earnings, buyers may examine margins, growth, sustainability, risk and transferability before forming a view.

Revenue based valuation approaches are relevant in some industries and situations, but they are the exception rather than the default, and they still rest on assumptions about the earnings that revenue is expected to produce.

Before running any numbers, it is worth testing how a buyer would experience the business. Work through these honestly.

• Could the business operate without you for 30 to 60 days?
• Are revenue and earnings stable or growing?
• Can your add backs be documented?
• Does any one customer represent a significant portion of revenue?
• Would important employees likely remain after a sale?
• Can management operate the company without you?
• Are financial records current and reliable?
• Is customer acquisition repeatable?
• Are key supplier relationships transferable?
• Are there major capital expenditure or working capital requirements?

The more transferable, sustainable and verifiable the earnings are, the easier it generally becomes for a buyer to underwrite the business, including a buyer who plans to finance part of the purchase through an SBA 7(a) loan. Where the answers point to work that needs doing first, that work belongs to preparing to sell your business rather than to the sale process itself.

A preliminary formula can give you a starting point. Determining how buyers may evaluate your specific business requires looking at the earnings, add backs, growth, customer base, owner involvement, management, financial records and transaction specific factors together. That is the purpose of a professional business valuation.