How Do I Know What a Business Is Worth?
Most small businesses are valued as a multiple of their normalized cash flow: Seller’s Discretionary Earnings (SDE) for owner-operated Main Street businesses, or EBITDA for larger companies with management in place. The multiple rises or falls with risk, growth, customer concentration and owner dependence. A fair price is one the verified cash flow can support, covering debt service, paying you and returning your investment. A Certified Valuation Analyst can test the numbers before you make an offer.
For executives who read financial statements every day but have not yet priced a privately held company.
What is the difference between SDE and EBITDA when buying a business?
Private companies are valued on cash flow, but which cash flow depends on the size and structure of the business.
| SDE (Seller’s Discretionary Earnings) | EBITDA | |
|---|---|---|
| What it measures | Total cash benefit to one full-time owner-operator | Earnings before interest, taxes, depreciation and amortization |
| Owner’s pay | Added back: the owner’s salary and benefits are included | Deducted: assumes a market-rate manager is paid |
| Typical use | Owner-operated Main Street businesses | Larger lower middle-market companies with management in place |
| Common add-backs | Owner compensation, personal expenses, one-time costs, interest, depreciation | One-time or non-recurring expenses, owner costs above market rate |
The most important step is normalization: adjusting reported profit for owner perks and one-time items so you see the true, repeatable cash flow. Every add-back should be documented and verifiable.
How are valuation multiples for small businesses determined?
The multiple applied to SDE or EBITDA reflects how risky and transferable that cash flow is. Comparable sales in the industry provide a starting range, and the specific business moves up or down within it.
Factors that raise a multiple
- Several years of stable or growing cash flow
- Recurring revenue and contracts
- Diversified customers
- Management and trained staff in place
- Documented systems and clean books
- Clear growth opportunities
Factors that lower a multiple
- Declining or erratic results
- Heavy customer concentration
- Owner does everything
- Unverifiable add-backs
- Aging equipment needing reinvestment
- Short or uncertain lease
What is a fair price for an existing business?
A fair price is one that verified cash flow can support. Ask four questions of any asking price:
- Is the cash flow real?Reconcile the seller’s numbers with tax returns and bank statements, and scrutinize every add-back.
- What is included?Clarify inventory, equipment, working capital and whether real estate is included or priced separately.
- Will a lender support it?If an SBA lender will not finance the price based on cash flow, that is an important signal.
- Do the terms fit the price?Price and terms work together. Seller financing, transition support and earn-outs can make a price workable or unworkable.
How do I calculate ROI on a business acquisition?
Executives often compare an acquisition to other investments. A simple way to look at your cash return:
Owner cash flow (SDE) − annual debt service − reinvestment = cash available to you
Cash available to you ÷ total cash you invested (down payment + closing costs + working capital) = annual cash-on-cash return
Remember that this cash also compensates you for the work you put in as owner. To compare fairly, consider what you would pay a manager to do your job. On top of annual cash, your equity grows as debt is paid down and the business grows.
Jason’s published example shows how leverage changes the picture: with SBA financing, a buyer with $25,000 could purchase a $500,000 business netting about $125K a year after debt service. (Illustrative; results vary.)
What are the 5 financial numbers every business buyer must understand?
Revenue trend
Multi-year direction of sales, and what is driving it.
SDE or adjusted EBITDA
Normalized, repeatable cash flow, the basis of value.
Verified add-backs
Each adjustment documented and defensible to a lender.
Debt service coverage
How comfortably cash flow covers all loan payments.
Working capital & capex
Cash the business needs to operate and stay competitive.
Valuation disagreements are a common reason deals stall after an offer. Understanding these five numbers up front helps you make an offer you can defend, and finance.
How does ESS help buyers judge what a business is worth?
Jason is a Certified Valuation Analyst. Before you commit, we help you normalize the seller’s cash flow, test the add-backs, compare price to what lenders will support and negotiate terms that protect your return.
Identify the right business
We map what you love, your skill sets, the schedule you want and your income goals, then brainstorm industries where your corporate experience gives you an edge.
Find listed and off-market deals
We search active listings and tap off-market opportunities through our intermediary network, so you see businesses many buyers never hear about.
Value the opportunity
As a Certified Valuation Analyst, Jason helps you test the seller's numbers, normalize cash flow and judge whether the price is supported.
Structure the funding
We connect you with SBA lenders and help you blend bank debt, seller financing and your own capital, with the focus where lenders put it: cash flow.
Negotiate the LOI and terms
Jason is a Certified Master Negotiation Expert. He helps you craft the Letter of Intent and negotiate price, terms and transition support.
Manage diligence through closing
We help you assemble your team of attorneys and accountants, organize due diligence and keep the deal moving to the closing table.
Every consultation includes our free Buyers Guide to Successful Acquisitions.
DBA · CVA · CMAP
Why does a CVA matter when you are buying?
Dr. Jason J. Hubler is a Certified Valuation Analyst (CVA) and member of NACVA, as well as a Business Intermediary and M&A Advisor since 2013. Buyers get the same valuation discipline used to price businesses for sale, applied to their side of the table.
- Doctorate of Business Administration (DBA), Leadership Studies
- Certified Valuation Analyst (CVA)
- Certified Value Builder (CVB)
- Certified Master Negotiation Expert (CMNE)
- Certified Merger & Acquisition Professional (CMAP)
- Business Intermediary & M&A Advisor, Main Street and lower middle market, since 2013
- 25+ years in sales and entrepreneurial ventures
- President, Pennsylvania Business Brokers Association
- Member: IBBA, NACVA and M&A Source
- 120+ businesses sold
“…I am laser focused on helping buyers buy small main street and lower-middle market businesses, helping buyers overcome their challenges and fears…”
— Dr. Jason J. Hubler
Based in York, Pennsylvania. Serving buyers nationwide, 100% confidential.
Buying the company he knew best
Craig Brindley had worked at American Mortgage Funding for more than ten years. With ESS, he bought the company with no money out of pocket, using a creative deal structure.
His deal shows that value is about more than the headline price: how the purchase is structured determines whether it works for the buyer.
Craig Brindley, American Mortgage Funding
Questions about valuing a business before you buy
How do I value a small business before buying it?
Start with normalized cash flow, either Seller's Discretionary Earnings for owner-operated businesses or EBITDA for larger companies with management in place. Apply a multiple supported by comparable sales and adjusted for the business's specific risks and strengths, then confirm a lender will support the price.
What is the difference between SDE and EBITDA?
SDE adds the owner's salary and benefits back to profit and shows the total cash benefit to one owner-operator. EBITDA deducts a market-rate manager's pay and is typically used for larger companies with management in place.
What is a fair price for an existing business?
A fair price is one the verified cash flow can support: it covers debt service and reinvestment, pays you a reasonable income and returns your investment. Price and terms work together, so seller financing and transition support matter too.
How much should I pay for a profitable business?
Pay based on verified, repeatable cash flow and the risk attached to it, not the asking price alone. Businesses with recurring revenue, diversified customers and management in place usually command higher multiples than owner-dependent businesses.
How do I calculate ROI on a business acquisition?
Subtract annual debt service and reinvestment from owner cash flow to find the cash available to you, then divide by the total cash you invested. Remember that part of that return pays for your work as owner, and your equity grows as debt is repaid.
Why should a buyer work with a Certified Valuation Analyst?
A CVA applies formal valuation methods to normalize cash flow, test add-backs and assess risk, helping you avoid overpaying and make an offer you can defend to the seller and your lender.
Make sure the price is right before you sign
Schedule a confidential call with Dr. Jason J. Hubler, CVA, to talk through a business you are considering or the kind of company you want to buy. Your consultation includes our free Buyers Guide to Successful Acquisitions.