The three primary business valuation approaches are: (1) Income Approach—values business based on future earnings potential using methods like Discounted Cash Flow (DCF) or Capitalization of Earnings, most common for profitable businesses with predictable cash flows; (2) Market Approach—compares your business to similar sold companies using earnings multiples (EBITDA multiples of 3-7x for small businesses, 5-12x for mid-market), relies on comparable transaction data; (3) Asset Approach—calculates net asset value by subtracting liabilities from assets, adjusted for fair market value, typically used for asset-heavy businesses or liquidation scenarios.

Most professional valuations use multiple methods for cross-validation.

For small businesses under $5M revenue, earnings multiples are most common (2-4x SDE for service businesses, 3-5x for product businesses).

The chosen method depends on industry, profitability, growth trajectory, and valuation purpose (sale, estate planning, partnership buyout).

EBITDA multiple valuation multiplies your business's annual EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) by an industry-specific multiple to determine enterprise value.

Formula: Business Value = EBITDA × Industry Multiple.

EBITDA represents true operating profitability before financing and accounting decisions.

Industry multiples vary: SaaS companies 8-15x, healthcare services 6-10x, manufacturing 4-7x, restaurants 2-4x, retail 3-6x.

Multiple drivers include: revenue growth rate (20%+ growth adds 2-3x to multiple), profit margins (higher margins command premium multiples), customer concentration (diverse customer base increases value), recurring revenue percentage (80%+ recurring revenue adds 1-2x), and market position (category leaders get 30-50% premium).

For a software company with $2M EBITDA at 10x multiple, enterprise value = $20M.

Subtract net debt and add cash to get equity value.

Small businesses under $1M EBITDA typically use Seller's Discretionary Earnings (SDE) multiples instead, which are 1-2x higher than EBITDA multiples because SDE includes owner compensation.

The top valuation drivers in order of impact: (1) Revenue Growth—20%+ annual growth can increase multiples 50-100%, stagnant growth decreases value 20-30%; (2) Profitability—EBITDA margins above industry average command 15-25% premium, negative EBITDA typically valued at 0.5-1.5x revenue; (3) Customer Diversification—no single customer >10% of revenue adds 10-20% value, concentration risk decreases value 15-30%; (4) Recurring Revenue—80%+ recurring (subscriptions, contracts) adds 30-50% premium over transactional revenue; (5) Scalability—standardized processes and systems enabling growth without proportional cost increases add 20-35% value; (6) Management Team—business not dependent on owner worth 25-40% more than owner-centric operations; (7) Market Position—#1 or #2 in niche adds 20-30% premium; (8) Intellectual Property—patents, trademarks, proprietary technology add 15-25% value.

Additional factors: customer acquisition cost trends, employee retention rates (>90% adds value), contract length (multi-year contracts premium), regulatory environment, and exit readiness (clean financials, documented processes).

Small businesses under $1M revenue typically use Seller's Discretionary Earnings (SDE) multiples rather than EBITDA.

SDE = Net Profit + Owner Salary + Interest + Depreciation + Discretionary Expenses, representing total financial benefit to single owner-operator.

Industry-specific SDE multiples: service businesses 1.5-3x, e-commerce 2-4x, established franchises 2.5-4x, professional services 1-2.5x, local retail 1.5-3x.

Valuation formula: Business Value = SDE × Multiple.

For $800K revenue business with $200K SDE at 2.5x multiple, value = $500K.

Multiple adjusters: owner working 60+ hours/week decreases multiple 20-30% (buyer must replace that labor), existing employees increase value 15-25%, online presence and documented processes add 10-20%, growth trend (increasing revenue 3+ years) adds 25-35%.

Alternative method for very small businesses: revenue multiples of 0.3-0.8x annual revenue for service businesses, 0.5-1.2x for product businesses.

Micro-businesses under $250K revenue often valued at 1-2x annual profit plus inventory.

Key: small businesses sell based on lifestyle replacement—what income and hours will buyer get for their investment.

Professional valuations ($5,000-$50,000 cost depending on business size) are essential for: (1) Business Sale—required by most buyers and banks, certified valuation protects against liability, costs 0.1-0.5% of sale price but often increases final price 5-15% through negotiation credibility; (2) Estate Planning—IRS requires qualified appraisal for estates over $13.6M (2025), prevents challenges and penalties; (3) Partner Buyouts—buy-sell agreements specify valuation method, professional report prevents disputes, courts accept certified valuations; (4) Divorce Proceedings—court-admissible valuation required, costs split between parties; (5) Shareholder Disputes—independent valuation resolves conflicts; (6) Financial Reporting—public companies require annual valuations, private companies need valuations for stock option plans.

Use DIY calculators for: preliminary sale price estimates, annual performance tracking, or informal negotiations.

Certification levels: Calculation of Value ($2,000-$5,000, limited scope), Summary Valuation Report ($5,000-$15,000, moderate detail), Comprehensive Valuation Report ($15,000-$50,000+, court-admissible, IRS-compliant).

Hire Accredited Senior Appraiser (ASA) or Certified Valuation Analyst (CVA) for legal/regulatory purposes.

For businesses over $5M value, professional valuation ROI typically exceeds 10:1 through tax savings and negotiation advantages.

Valuation represents theoretical worth based on financial metrics, while asking price reflects market dynamics and seller objectives—often differing 15-40%.

Common gaps: (1) Seller Premium—owners add 20-30% emotional premium for sweat equity and attachment, should be negotiated down; (2) Market Conditions—seller's market (high demand, low inventory) supports 10-25% premium over valuation, buyer's market discounts 15-30%; (3) Strategic Value—competitor acquisitions pay 30-60% premium for synergies (customer base, technology, market share), financial buyers pay closer to calculated value; (4) Negotiation Room—experienced sellers list 15-25% above target price expecting negotiation, naive sellers overprice 40-60% and don't sell; (5) Terms Impact—seller financing increases acceptable price 10-20% vs. all-cash deals, earn-outs allow higher stated price with performance contingencies.

Asking price red flags: 2x+ calculated value without strategic justification, based on "what I need to retire," comparable to businesses 3x larger, or unchanged after 12+ months on market.

Fair asking price: 0-20% above professional valuation with supporting rationale (strategic assets, growth trajectory, unique market position).

Actual sale prices typically settle 5-15% below initial asking price through negotiation.

List at maximum defensible price supported by financial data, expect buyer due diligence to reveal 10-20% worth of adjustments, final price reflects balance of leverage and market conditions.