How to Value a Small Business
Wherever you are in your business’s lifecycle, it’s important to know its value.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
Updated · 4 min read
Written by
Edited by
Managing Editor 
More than one-third of small-business owners (37%) plan to sell their business in the next 12 months. That's according to a June 2025 survey from U.S. Bank.
No matter which side of that transaction you're on, valuation is key. For sellers, knowing your business's value can maximize your exit. For buyers, it's crucial for assessing the health and potential of a business. Here's what to know.
Smart money moves for your business
Grow your small business with tailored insights, recommendations, and expert content.
How to value a small business
Here are the main steps to begin valuing a business. If you're looking to buy, you should be comfortable doing these on your own. That can ensure the business owner or broker’s asking price (and your offer) feel "fair."
But if you're not at that point yet, consult a professional. Hiring your own broker can get you started. An adviser with transaction experience, like a CPA, may also be useful.
1. Understand the terms
Business valuation can be tricky. The best place to start is by understanding a couple key definitions.
Seller’s discretionary earnings
Seller’s discretionary earnings (SDE) is the revenue a business actually generates. It's also known as:
- Adjusted cash flow.
- Total owner’s benefit.
- Seller’s discretionary cash flow.
- Recast earnings.
In short, this is the total financial value you would get from a business on an annual basis.
🤓 Nerdy Tip
SDE differs from EBITDA. The latter refers to "earnings before interest, taxes, depreciation and amortization." Large businesses generally use EBITDA to value their businesses. Small businesses typically opt for SDE. In part, that's because SDE includes the owner’s salary and benefits. Small-business owners often expense such personal benefits. SDE multiple
An SDE multiple values a business according to industry standards. Every industry has its own multiple.
Your SDE multiple will vary based on:
- Market volatility.
- Your business location.
- Your company’s size and assets.
- The level of risk in transferring ownership.
The higher your SDE multiple, the more your business is worth. If you use EBITDA to value your business, you would use an EBITDA multiple instead.
2. Calculate your business's SDE
This is mostly for sellers. But buyers might ask about your discretionary cash flow based on your valuation. Prepare to include and value each major expense or purchase.
Step 1: Find your pretax, pre-interest earnings.
Step 2: Add to that total purchases you report as business expenses that aren’t essential. These may include vehicles or travel, for instance. Include employee outings, charitable donations, one-time purchases and your own salary as well.
Step 3: Subtract any current debts or future payments from the net income.
Step 4: Compare with your SDE multiple.
3. Organize your documents
Organized records can help ensure an accurate calculation and smooth valuation process. These documents will also be crucial for the actual transfer of ownership.
Business owners need the following:
- Licenses, deeds and any proprietary documents.
- Profit and loss statements and balance sheets for the last three years.
- Tax filings and returns.
- Short overview of your business or personal finances.
Buyers won't need all these documents. They should still review their own financials, though. Sellers will want the credit report and basic financial profile of potential buyers.
Buyers may also want to see a business plan. This can provide insight into:
- Projected earnings.
- How your business will continue to grow and turn a profit.
- Important context about your company and its key services or goods.
A business plan should detail your business model as well, which shows how you make money. This helps potential buyers understand how they’ll reach their new customers.
Find the right loan for your business
Tell us how much you need and see your options in minutes.4. Take stock of your assets and liabilities
Assets and liabilities are an important factor in a business’s overall value. Both sellers and buyers should know these details.
Business assets are anything that adds value to your company. Even items like intellectual property, your production line or company vehicles count.
There are two types of assets: tangible and intangible. You weigh them differently when calculating a business’s total value.
- Tangible assets lose value over time. You use these physical assets for regular business operations. Things like real estate, equipment, inventory and cash on hand are tangible assets.
- Intangible assets' value depends on the company itself. These items hold value, but you can't see or touch them. They include things like patents, copyrights or trademarks. Customer loyalty, reputation and intellectual property are also examples.
Liabilities are a business's outstanding obligations. These detract value from a business. They include accounts and notes payable, business loans, accrued expenses and unearned revenue. Owners often keep business liabilities, paying them off after selling the business.
5. Research the industry
An informed valuation will reflect a business’s assets, as well as the current market. A deep understanding of an industry’s trends is crucial to this. It helps you:
- Determine the SDE multiple, as well as the method of valuation used.
- Assess market share and growth potential.
- See what comparable businesses are selling for.
What are the different small-business valuation methods?
There are several business valuation methods. Each uses a different aspect or variable. Don't mix and match formulas or approaches to ensure consistent calculations.
Most online business valuation calculators use a variation of the income approach. But if you have more financial information, you can try a more comprehensive calculation.
Income approach
This approach determines how much income a business can expect to generate in the future. There are two common methods to calculate that number:
- Discounted cash flow method. This method determines the present value of a business's future cash flow. It adjusts (or discounts) the business's cash flow forecast based on the risk involved in purchasing the business. This approach is best for newer businesses with high-growth potential, but aren’t yet profitable.
- Capitalization of earnings method. This method also calculates a business’s future profitability. But it takes into account the business’s cash flow, annual rate of return (or return on investment) and its expected value. The discounted cash flow method accounts for more future fluctuations. The capitalization method, however, assumes that the calculations remain consistent. So, established businesses with stable profitability often use this valuation approach.
Asset-driven approach
Versions of this approach attribute value to a business based solely on its assets. In particular, the Adjusted Net Asset Method calculates the difference between assets — tangible and intangible assets—and liabilities. It adjusts both to their fair market values.
Asset valuations are also a great tool for internal use. They can help you keep track of spending and capital resources.
To do an asset-driven assessment, make a list of your assets and assign them a monetary value. Price equipment and other depreciating assets between their sale price and the depreciated value.
A good rule of thumb is to use how much a piece of equipment would sell for today. Even if you don't adjust assets to the current market, you can still get a good sense of a business’s material value.
This method is especially useful if your business:
- Mostly holds investments or real estate.
- Isn’t profitable.
- Is seeking to liquidate.
In these cases, buyers will want the individual value of your investments or equipment.
Market approach
The market approach determines a company’s value based on comparable purchases and sales. This approach is best for finding an appropriate price for your local market. It can be an especially useful for rapidly growing businesses and industries.
The key to this approach is gathering enough relevant data. Working with a local business broker can help. Websites like BizBuySell also offer business sales data. Combine sources to get a complete picture.
Article sources
NerdWallet writers are subject matter authorities who use primary,
trustworthy sources to inform their work, including peer-reviewed
studies, government websites, academic research and interviews with
industry experts. All content is fact-checked for accuracy, timeliness
and relevance. You can learn more about NerdWallet's high
standards for journalism by reading our
editorial guidelines.
- 1. U.S. Bank. U.S. Bank survey looks at small business stressors, AI and succession plans. Accessed Jan 9, 2026.
On this page
