Which Business Valuation Method Is Right for Your Business?

If you run an owner-operated business earning less than $1 million annually, the SDE multiple method is almost certainly your best choice. SDE represents the total pre-tax economic benefit a single owner-operator receives from the business. You calculate it by starting with net income and adding back the owner's salary, personal benefits, interest, depreciation, amortization, and one-time expenses.

Once you have SDE, you multiply it by an industry-specific factor (typically 1.5 to 4.0 for most small businesses). A well-established plumbing company with $300,000 in SDE might sell for 2.5 times SDE, or $750,000. The multiple reflects the buyer's perceived risk, growth potential, and the availability of financing.

This method works well because it normalizes the financials to show what a new owner can expect to earn. It accounts for the fact that small business owners often run personal expenses through the business or pay themselves differently than a salaried manager would be paid.

Once your business earns more than $1 million annually and has a management team in place, EBITDA multiples become the more appropriate choice. Unlike SDE, EBITDA does not add back the owner's salary because these businesses usually have (or should have) a professional management team in place.

EBITDA multiples for small to mid-market businesses generally range from 3x to 7x, though high-growth technology companies or businesses with recurring revenue can command 8x to 12x or higher. The multiple depends on industry, growth rate, customer diversification, and operational risk. A manufacturing company with $2 million in EBITDA might sell for 4.5x, or $9 million.

If your business is pre-profit or in a high-growth phase, revenue multiples may be the most appropriate method. This approach is most commonly used for high-growth startups, SaaS companies, and businesses where profitability has been intentionally deferred in favor of growth. It is also used when a business is unprofitable but has strong revenue momentum.

Typical revenue multiples range from 0.5x to 2.0x for traditional small businesses and can reach 5x to 15x for SaaS companies with strong retention metrics. The wide range reflects the fact that revenue alone tells you little about the quality of the earnings. A company with $5 million in revenue and 5% margins is fundamentally different from one with $5 million in revenue and 30% margins.

Use revenue multiples with caution. They are a useful shorthand, but they can be misleading for businesses where profitability is the primary driver of value.

If your business has predictable, recurring cash flows, a discounted cash flow analysis may produce the most accurate result. You forecast the business's free cash flow for a period (usually five to ten years), then discount those cash flows back to today using a discount rate that reflects the risk of achieving those projections. A terminal value captures the value beyond the projection period.

DCF is theoretically the most accurate valuation method because it captures the specific cash-generating potential of the business rather than relying on comparisons to other companies. In practice, however, it is highly sensitive to assumptions. Small changes in the growth rate, discount rate, or terminal value can produce dramatically different results.

This method is most useful for businesses with predictable, recurring cash flows (like subscription businesses or long-term contract businesses) where projections can be made with reasonable confidence. It is less suitable for small businesses with volatile earnings.

For asset-heavy businesses or liquidation scenarios, asset-based valuation may be the only method that makes sense. This approach calculates the value of a business by adding up the fair market value of all its assets and subtracting its liabilities. It is most relevant for real estate holding companies, equipment rental firms, and inventory-intensive retailers.

There are two variations. The going-concern approach values assets at their fair market value assuming the business continues operating. The liquidation approach values assets at what they would sell for in a forced or orderly sale. The going-concern value is always higher because it includes the value of the business as an operating entity.

For most profitable service businesses, asset-based valuation produces the lowest estimate because it ignores the earning power and goodwill of the business. However, it serves as a useful floor value. No rational seller should accept less than the net asset value of their business.

For a small, owner-operated business, start with the SDE multiple method. It is widely understood by brokers, lenders, and buyers. For a larger business with professional management, use EBITDA multiples. If the business is pre-profit or in a high-growth phase, revenue multiples provide a useful reference point. You can run a free valuation using SDE or EBITDA to see which method produces a more meaningful result for your business.

In practice, experienced appraisers often use multiple methods and triangulate the results. If the SDE method suggests $800,000, the DCF method suggests $900,000, and the asset-based method suggests $400,000, the appraiser might conclude a value range of $800,000 to $900,000 with a floor of $400,000. Using more than one method increases confidence in the final number. For a deeper dive into how multiples differ across sectors, explore our industry benchmarks.