How is a business valued when you're ready to sell?

Most businesses are valued using a multiple of their annual earnings, typically somewhere between 2 and 5 times. The multiple a buyer is willing to pay depends on how risky they see the business, how dependent it is on you personally, and how clean and consistent your financials are. Once you understand the math, the number stops feeling like a mystery.

The basic formula

The starting point for almost every business valuation is this:

Value = Earnings × Multiple

Before you can calculate the multiple, you need to agree on what “earnings” means. For most smaller businesses, the most common measure is seller’s discretionary earnings, or SDE.

For larger businesses, typically those doing $1 million or more in SDE, buyers often shift to using EBITDA instead.

Both measures are trying to answer the same question: if you bought this business tomorrow and ran it reasonably well, what would it actually put in your pocket each year?

What determines the multiple

This is where two identical-looking businesses can have very different valuations. The multiple reflects risk. Lower risk means a higher multiple.

Here are the main factors that push a multiple up or down:

What raises the multiple:

• The business can run without you being there every day
• Revenues are diversified across many customers (no single customer is more than 15–20% of revenue)
• Financials are clean, consistent, and easy to verify
• The business has been operating for 10 or more years
• You have documented processes and a capable team

What lowers the multiple:

• The business depends heavily on your personal relationships or skills
• One or two customers make up most of your revenue
• Financials are mixed with personal expenses or hard to read
• Revenue has been inconsistent year to year
• You are the primary salesperson, service provider, or decision-maker

What your industry trades at

Multiples vary significantly by industry. Here are rough ranges based on typical market activity for businesses with $500,000 to $5 million in SDE:

Industry	Typical SDE Multiple
HVAC, plumbing, electrical	2.5 – 4×
Landscaping, pest control	2 – 3.5×
Manufacturing	3 – 5×
Professional services	3 – 5×
Auto repair	2 – 3×
General contracting	2 – 3.5×

These are starting points, not guarantees. A well-run HVAC business with recurring service contracts and a strong team can trade at the top of its range or above. A business with messy books and high owner-dependence will land at the bottom.

How to get a real number

There are three ways to get a valuation, in order of cost and formality:

1. Ballpark from a broker or CPA A business broker or CPA who works with owners can give you a rough range based on your financials and industry in a short conversation. This is often free or low-cost as part of a broader relationship. It’s useful for early planning and deciding whether to invest more time.

2. Broker Opinion of Value (BOV) A more detailed estimate from a business broker who knows your market. Typically $500 to $2,500. Based on comparable sales data and your specific financials.

3. Formal certified valuation A full report from a credentialed valuation specialist. Typically $3,000 to $10,000 depending on complexity. Required for legal purposes (estate, divorce, buy-sell agreements), partnerships, and serious pre-sale planning.

Most owners don’t need a formal valuation until they’re serious about a sale or facing a specific legal need. The ballpark is often enough to start.

What you can do right now to improve your number

If you’re thinking about selling in the next 3 to 5 years, the best time to start working on your valuation is now, not the year before you sell.

The highest-leverage things to focus on:

1. Reduce owner-dependence. Document your processes. Train someone to handle the things only you can handle. A business that runs without you is worth more than one that doesn’t.
2. Clean up your financials. Separate personal expenses from business expenses. Consistent, readable books make buyers more comfortable and reduce the risk of price renegotiation.
3. Diversify your customers. If one customer is more than 20% of your revenue, that’s a risk a buyer will price in.
4. Build recurring revenue where you can. Service contracts, maintenance agreements, and retainers create predictable cash flow. Buyers pay more for predictability.

None of these are quick fixes. But they compound. Three years of focused effort can meaningfully change the number.

When to talk to a valuation specialist

The right time to get a real number is before you think you need one. Most owners who wait until they’re ready to sell wish they’d started planning earlier.

If you want to understand what your business is worth today, and what it could be worth with some work, talking to someone who does this for owners in your industry is the best first step.

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Common questions owners ask

What multiple do businesses typically sell for?

Most small to mid-size businesses sell for 2 to 5 times their annual earnings. The exact multiple depends on your industry, how long you've been in business, how reliant the business is on you personally, and how clean your financials are. Businesses in some industries, like software or professional services, can trade higher. Trades businesses typically fall in the 2 to 4 range.

What is EBITDA and why does it matter?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It's a way of measuring what the business actually produces in cash, before accounting adjustments and financing decisions. Buyers and valuation specialists use it because it's easier to compare across different businesses. For smaller businesses, a similar number called seller's discretionary earnings (SDE) is often used instead.

Can I increase my business's value before selling?

Yes, and it's worth doing. The biggest levers are reducing your personal involvement in day-to-day operations, cleaning up your financial records, diversifying your customer base if you're heavily concentrated, and documenting how the business runs. Each of those reduces perceived risk for a buyer, which typically raises the multiple they're willing to pay.

Do I need to pay for a formal valuation?

Not necessarily to start planning. A ballpark from a business broker or CPA costs less and is often enough to get oriented. A formal certified valuation, usually $3,000 to $10,000 depending on business size and complexity, is worth paying for when you're close to a sale, need it for legal purposes, or are figuring out estate planning.