The most common question every business owner asks before selling is some version of: what is my business actually worth? The answer is both simple and complicated. The simple answer is that your business is worth what a qualified buyer will pay for it in an arm's-length transaction. The complicated answer is that buyers use specific methodologies to calculate that number, and understanding those methodologies — before you go to market — is essential to pricing your business correctly, preparing your financials appropriately, and avoiding the most costly mistakes sellers make.

This guide covers the three primary valuation metrics used in business sales, how multiples are determined by industry, what factors push valuations up or down, and how to get an honest estimate of your business's value before engaging a broker or going to market. At The Deal Flow Source, we have reviewed valuations across more than 1,000 businesses in 29 categories — the frameworks in this guide reflect real market data, not theoretical models.

The Core Valuation Formula

Almost every small and mid-market business sale uses a simple formula:

Business Value = Earnings × Multiple

The earnings figure is a normalized measure of what the business produces annually, adjusted to remove non-recurring items and owner-specific expenses. The multiple is a market-determined number reflecting how buyers in your category value those earnings relative to risk, growth, and transferability. Both variables matter equally: a high multiple applied to incorrectly stated earnings produces a wrong number, and correct earnings applied with the wrong multiple produces an equally wrong number.

The Three Earnings Metrics: SDE, EBITDA, and ARR

Which earnings metric applies to your business depends primarily on its size and whether the owner works in it.

SDE: Seller's Discretionary Earnings

SDE is the earnings metric for owner-operated businesses, typically those generating under $2 to $3 million in total enterprise value. It represents the total economic benefit the business produces for a full-time owner-operator: the business's net income plus the owner's compensation (salary and distributions) plus any personal expenses run through the business, plus depreciation and amortization, plus non-recurring or one-time expenses.

In this example, a business showing $180,000 on its tax return has an actual SDE of $324,400. At a 3x multiple, that is a $973,200 business — not a $540,000 business based on raw net income. This is why working with a CPA experienced in business sales to properly recast your financials before listing is so important.

EBITDA: For Professionally Managed Businesses

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is used for businesses large enough to operate with professional management — typically those generating $2 million or more in enterprise value. Unlike SDE, EBITDA does not add back owner compensation. Instead, it assumes a market-rate manager is running the business, so the owner's salary is replaced by what it would cost to hire a professional CEO or general manager.

EBITDA is the preferred metric for private equity buyers and strategic acquirers because it reflects the business's earnings independent of ownership structure. A PE firm acquiring your business will replace you with a management team — EBITDA reflects what the business earns with that professional management cost baked in.

ARR: For Subscription and SaaS Businesses

Annual Recurring Revenue (ARR) is used for software-as-a-service (SaaS) and subscription businesses where the predictability and growth rate of recurring revenue are more relevant than current-period profitability. A SaaS business with $500,000 ARR growing 40% annually is valued very differently from one with the same ARR declining 10% annually. ARR multiples range from 1x to 8x or higher depending on growth rate, net revenue retention, churn, and market position.

How Multiples Are Determined

The multiple applied to your earnings is not arbitrary. It reflects market consensus about how much risk buyers are taking on, how transferable the business is, how much growth potential exists, and how competitive the buyer market is for your business type. Multiples are set by the market — by what buyers have actually paid for comparable businesses — not by what sellers think they deserve.

2026 Multiples by Business Category

For detailed multiples and buyer behavior for each of the 29 business categories we cover, see our full Business Valuation Guide library.

What Moves Your Valuation Up or Down

Within any given multiple range, where your business lands depends on specific quality factors. These are the levers you can actually control — and improving them before going to market is the highest-ROI preparation work you can do.

The Most Common Business Valuation Mistakes

Valuing Based on Revenue

Revenue is a vanity metric for business valuation purposes. A $5 million revenue business with $100,000 in SDE is worth $250,000 to $400,000. A $1 million revenue business with $350,000 in SDE is worth $875,000 to $1.4 million. Buyers buy earnings, not revenue. Do not let high revenue numbers anchor your price expectations unrealistically.

Using Gross Profit Instead of Net Earnings

Gross profit — revenue minus cost of goods sold — is not a valuation metric. It ignores all operating expenses including rent, payroll, insurance, and marketing. Some business owners confuse a strong gross margin with strong earnings. A 60% gross margin business generating $2 million in revenue might have $1.2 million in gross profit and only $180,000 in SDE after operating costs. Buyers look at SDE or EBITDA, not gross margin.

Not Recasting Financials Before Going to Market

Tax returns are prepared to minimize taxable income, not to maximize the apparent earnings of a business for sale. A properly recast profit and loss statement adds back legitimate owner benefits, non-recurring expenses, and accounting adjustments that reduce taxable income but do not reflect the true economic output of the business. Sellers who present raw tax returns without recast financials consistently get lower offers than those who present professionally normalized financials.

Anchoring to a Competitor's Reported Sale Price

Business sale prices are rarely public. When a competitor's sale price does circulate, it is usually an asking price, not a closed price — and it was negotiated under different market conditions with different financials. Comparable sale data for private businesses is genuinely thin. Rely on current market multiple data and your own normalized earnings, not on anecdotal competitor transactions.

Overweighting Asset Value

Unless you are selling a business where asset value exceeds earnings value (certain manufacturing, real estate-heavy, or asset-intensive businesses), buyers are primarily buying future earnings, not the depreciated book value of equipment and furniture. A restaurant with $200,000 of kitchen equipment and $60,000 in annual SDE is a $150,000 to $240,000 business, not a $260,000 business because of its assets.

How to Get an Honest Valuation

There are three ways to get a business valuation, each with different levels of depth, cost, and purpose.

Informal Broker Opinion of Value

A licensed business broker or M&A advisor reviews your financials and provides a market-based valuation range based on normalized earnings and current market multiples. This is appropriate for sellers in the early stages of considering a sale, costs nothing when provided as part of a listing consultation, and gives you a realistic anchor for decision-making. The Deal Flow Source provides complimentary valuation consultations for businesses seeking to list on our marketplace.

Formal Broker's Opinion of Value (BOV)

A more formal written valuation document prepared by a licensed broker, typically including market comparable data, earnings normalization schedule, and a defined value range. Appropriate for businesses between $500,000 and $3 million where a formal opinion helps in pre-sale planning, partner buyouts, or estate purposes. Cost typically ranges from $1,500 to $5,000.

Certified Business Appraisal

A full appraisal performed by a Certified Valuation Analyst (CVA) or Accredited Senior Appraiser (ASA) following USPAP standards. Required for SBA lending above certain thresholds, litigation, estate and gift tax, and formal M&A advisory engagements. Cost typically ranges from $5,000 to $15,000+ depending on business complexity. For most small business sales, a formal appraisal is not required — a well-supported broker opinion is sufficient to take a business to market.

Related Resources

• How to Sell a Business in Florida: The Complete 2026 Guide
• SDE vs. EBITDA vs. ARR: Which Valuation Method Applies to You?
• How to Prepare Your Business for Sale
• The Buyer-Pays Business Broker Model Explained
• Valuation Guides: 29 Business Types