It’s one of the first questions most business owners ask when they start thinking about selling. What is my business worth? It sounds like a simple question, and most owners expect there to be a relatively straightforward answer. In practice, it rarely works that way, and anyone searching for how to value a business quickly finds that the answer is usually some version of “it depends.”
Some owners hear general ranges from peers. Others come across rules of thumb or industry multiples online. In many cases, they are looking for a quick way to estimate what their business might sell for. That can feel like a reasonable starting point, but a business is not valued in isolation. It is evaluated in context, and two companies with similar revenue or even similar earnings can be viewed very differently depending on how they operate, how they are structured, and how a Buyer expects to run them after a transition.
The best way to begin answering the question is not with a formula or a quick online business valuation tool, but with a conversation. A good broker will spend time understanding the business beyond the financial statements. That includes how the company has developed over time, how work flows through the organization, and who is responsible for key relationships. Customers, suppliers, and team structure all play a role, as does the level of dependence on the current owner. In some cases, certifications or specialized knowledge may also factor into how the business is evaluated. These details are not separate from valuation. They help define it.
From there, the financial picture begins to take shape in a more meaningful way. Historical performance is reviewed to understand not just what the business has earned, but how consistent those earnings have been over time. Trends begin to matter. One-time expenses are identified. Owner-specific benefits are evaluated and, where appropriate, adjusted. This process, often referred to as recasting financials, helps present a clearer picture of the earnings a Buyer is actually acquiring.
At that point, the question becomes how those earnings should be viewed. Some businesses are evaluated on Seller’s Discretionary Earnings (SDE), particularly when a Buyer is expected to step in and operate the company directly. Others are evaluated on EBITDA, which reflects a business that can support management beyond the owner. Understanding whether a business should be valued on SDE or EBITDA is a key part of determining what a business is worth and depends on how the business is expected to function after a transition.
Only after those pieces are understood does the market come into play. Comparable transactions, industry dynamics, and Buyer demand all influence how earnings are valued. While many small and Lower Middle Market businesses tend to fall within a general range, often around two to three times earnings, that range is only a starting point. The specifics of the business can move that number in either direction, sometimes meaningfully.
That is where the earlier conversations matter most. The same earnings can be interpreted very differently depending on how transferable they are, how stable they appear, and how much risk a Buyer believes they are taking on. Strong systems, diversified customers, and reduced owner dependency can support higher valuations, while concentration, inconsistency, or reliance on one individual can have the opposite effect. Value is not just a number that gets applied at the end of the process. It develops as the business is understood more clearly.
Over the next several weeks, we will break this process down in more detail. We will walk through how business valuation actually works, how earnings are determined, how valuation multiples are applied, and how Buyers interpret the same business in different ways. The goal is not to reduce valuation to a simple formula, but to provide a clearer view of how it is approached in the market and what Sellers should expect as they begin to explore a potential sale.
When it comes to selling your business, there are no do-overs. Understanding how value is determined is one of the most important steps in preparing for a successful outcome. If you want to begin that conversation, get in touch with the Business Seller Center.