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Business valuation guide

How to value a small or mid-size business

Business valuation is as much an art as a science. Two qualified appraisers can produce significantly different valuations for the same company depending on their methods, assumptions, and market context. That said, three frameworks dominate the valuation of private, small, and mid-market businesses. Understanding all three — and how they interact — gives buyers and sellers the clearest picture of a company's realistic market value.

1. SDE / EBITDA multiple method

The earnings multiple approach is the most widely used method for small and mid-size businesses. It answers the question: how much would an investor pay today to capture a stream of future earnings?

The two earnings bases used depend on business size:

• SDE (Seller's Discretionary Earnings): Used for businesses typically earning under $1 million per year. SDE adds back the owner's salary, owner benefits, personal expenses run through the business, and non-cash charges (depreciation, amortisation) to net income. It represents the total financial benefit a full-time owner-operator could derive from the business in a given year. A buyer asks: "what am I actually getting paid?"
• EBITDA: Used for larger businesses where a hired management team runs the company and the owner is not involved day-to-day. EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) normalises for capital structure and accounting differences, making businesses more comparable across buyers and industries.

The multiple applied to these earnings reflects perceived risk, growth potential, and buyer demand in the market. A well-run SaaS business with recurring revenue and low customer concentration might command 8–12× EBITDA, while a local service business with owner-dependent operations might sell for 2–3× SDE.

2. Revenue multiple method

Revenue multiples are common for high-growth businesses that are not yet profitable, or where profitability is intentionally suppressed by reinvestment. Buyers focus on topline revenue as a proxy for market share, customer relationships, and future earning potential.

Revenue multiples vary enormously by industry:

• SaaS / software: 3×–8× revenue for profitable, growing companies. Higher multiples (10×+) are possible for enterprise SaaS with net revenue retention above 120%.
• E-commerce: 0.5×–2× revenue, depending on margin profile, customer acquisition costs, and brand strength.
• Professional services: 0.5×–1.5× revenue. Lower multiples reflect human capital dependency (value walks out the door every evening).
• Retail: 0.25×–0.75× revenue. Thin margins and commodity competition drive low multiples.
• Healthcare / medtech: 1×–3× revenue for established practices; higher for tech-enabled healthcare businesses.

3. Asset-based method (book value)

The asset-based method values the business by calculating the net asset value (NAV) — what remains after subtracting total liabilities from total assets. This method is most relevant for:

• Asset-heavy businesses (real estate holding companies, equipment dealers, manufacturers) where tangible assets drive most of the value.
• Distressed businesses where earnings are negative or minimal and a buyer is effectively acquiring the underlying assets.
• Liquidation scenarios where the business is being wound down rather than sold as a going concern.

Pure asset-based valuation typically sets a floor value. Most profitable going-concern businesses sell for more than book value because goodwill, customer relationships, intellectual property, brand equity, and trained employees add value above and beyond the balance sheet. The premium paid above book value is called goodwill.

SDE vs EBITDA: which should you use?

The rule of thumb: businesses with SDE under $500K typically transact using SDE multiples; businesses with EBITDA above $1M typically use EBITDA multiples. The middle zone is flexible.

The critical adjustment for SDE is the add-back: you must accurately document and justify every expense added back to arrive at SDE. Buyers and their accountants will scrutinise these adjustments closely in due diligence. Undocumented or aggressive add-backs reduce credibility and can collapse a deal.

How multiple ranges work in practice

The specific multiple applied within an industry range depends on several value drivers:

• Revenue growth rate: A 30% YoY growth rate commands a meaningfully higher multiple than flat revenue.
• Customer concentration: If one customer represents 40% of revenue, most buyers will apply a significant discount. Ideal: no customer exceeds 10–15% of revenue.
• Owner dependency: A business that would fail without the current owner is worth less than one with a capable management team in place.
• Recurring vs project-based revenue: Subscription, retainer, or contract revenue trades at a premium over one-time or project revenue.
• Market conditions: When credit is cheap and deal flow is high, multiples expand. In downturns or credit squeezes, they compress.

Financial disclaimer