Formula for Business Valuation: 5 Methods That Actually Work

Why Most Business Valuation Formulas Are Wrong

Let me start with the truth: there's no single formula for business valuation that works across every deal. I've been through 5 SaaS exits, and each one used a different approach depending on what the buyer cared about.

The formula that matters is the one the person writing the check believes in. That said, there are 5 core valuation methods that come up in 90% of small to mid-sized business sales. I'll walk you through each one, when it's used, and how to actually apply it to your business.

Most business owners make the mistake of thinking valuation is purely mathematical. It's not. The numbers are just the starting point. Buyers evaluate risk, growth potential, customer concentration, owner dependence, and a dozen other factors that can add or subtract 1-2x from your multiple overnight.

SDE Multiple Method (Most Common for Small Businesses)

This is the dominant formula for businesses doing under $5M in revenue. Seller's Discretionary Earnings (SDE) multiple is what most brokers and buyers start with.

The formula: Business Value = SDE × Multiple

SDE is your net profit plus owner compensation, owner perks, non-recurring expenses, interest, taxes, depreciation, and amortization. Essentially, it's the cash benefit a single owner-operator would get from running the business.

The multiple typically ranges from 2x to 5x for most small businesses. Here's what drives it higher:

• Recurring revenue beats project-based revenue
• Documented processes beat owner-dependent operations
• Diversified customer base beats concentration risk
• Consistent growth beats flat or declining trends
• Strong margins beat razor-thin profits

I sold one of my agencies at 3.2x SDE because it had high customer concentration-two clients made up 60% of revenue. Another SaaS business went for 4.8x because it had 200+ customers paying monthly subscriptions with low churn.

The reason SDE works for small businesses is that individual buyers are essentially buying themselves a job plus profit. They need to understand the true cash benefit they'll receive after taking over operations. If you're paying yourself $80K in salary plus running $20K in personal expenses through the company, that all gets added back to arrive at the real earnings number.

One mistake I see constantly: business owners thinking a buyer will value potential revenue the same as actual revenue. They won't. Buyers discount heavily for anything that isn't already happening. If you say "this business could easily do $500K with the right marketing," the buyer hears "the current owner hasn't figured out how to do $500K."

Here's something most valuation formulas miss: your sales system is an asset that multiplies your multiple. I've worked with agencies generating $20 million in revenue who could've tripled their valuation just by documenting their cold email systems. One client I worked with built their business entirely on outbound-no ads, no referrals initially-and when they went to sell, buyers paid a premium because the lead generation was predictable and repeatable, not dependent on the founder's personal network.

Revenue Multiple Method (SaaS and High-Growth Businesses)

When I sold my SaaS companies, buyers cared more about revenue than profit. That's because SaaS businesses with proven product-market fit can scale profitability quickly once they have distribution.

The formula: Business Value = Annual Recurring Revenue × Multiple

SaaS multiples typically range from 3x to 10x ARR for private companies, depending on growth rate, churn, and market position. A bootstrapped SaaS growing 20% annually might sell for 3-4x ARR. A venture-backed company growing 100%+ can command 8-12x or higher.

The key metrics buyers examine:

• Monthly Recurring Revenue (MRR) and growth trend
• Customer Acquisition Cost (CAC) vs Lifetime Value (LTV)
• Net Revenue Retention (are existing customers expanding?)
• Churn rate (anything above 5% monthly is a red flag)
• Gross margin (SaaS should be 70%+ ideally)

Service businesses and agencies rarely use revenue multiples because revenue doesn't translate predictably to profit. But if you're running a productized service with high retention, you might negotiate based on ARR instead of SDE.

The Rule of 40 has become the benchmark for SaaS valuation in recent years. Add your growth rate to your profit margin-if it exceeds 40%, you're in the premium valuation zone. A company growing 30% with a 15% EBITDA margin (total of 45%) will command a significantly higher multiple than one growing 20% with 10% margin (total of 30%).

Here's something most founders don't understand about ARR multiples: not all revenue is valued equally. Monthly recurring revenue is worth roughly 2x more than annual contracts, and annual contracts are worth more than lifetime deals. Why? Predictability and the ability to walk away. Monthly subscribers demonstrate ongoing value delivery. Lifetime customers are a sunk cost-if your product degrades, they can't leave but they'll never expand either.

When building a business for exit, focus obsessively on monthly plans even if annual plans boost short-term cash flow. I've seen this decision alone add 1-2x to the final multiple.

EBITDA Multiple Method (Established Companies)

Once you're past $2-3M in revenue, buyers shift from SDE to EBITDA-Earnings Before Interest, Taxes, Depreciation, and Amortization. This is corporate finance language, and it's what private equity and strategic acquirers use.

The formula: Business Value = EBITDA × Multiple

EBITDA multiples for lower middle market companies (roughly $2M-50M in revenue) typically range from 3x to 7x. The difference between SDE and EBITDA is that EBITDA assumes a management team is in place-it doesn't add back an owner-operator's salary.

Private equity firms love EBITDA because it standardizes comparison across industries. A PE firm might buy 10 similar businesses, roll them up, and sell the combined entity at a higher multiple. That's called multiple arbitrage, and it's why they can pay more than individual buyers.

EBITDA multiples vary significantly by industry. Software and SaaS companies command the highest multiples (often 8-15x for profitable companies), while manufacturing and distribution businesses typically see 4-6x. Professional services firms fall somewhere in between at 5-8x, depending on client concentration and revenue quality.

The size of your business also affects the multiple. Companies under $1M EBITDA might see 3-4x. Between $1-3M EBITDA, you're looking at 4-6x. Above $5M EBITDA, multiples often jump to 6-8x or higher. This is called the "size premium"-larger businesses are less risky, have more institutional infrastructure, and attract more sophisticated buyers willing to pay higher prices.

One critical distinction: EBITDA for valuation purposes often differs from GAAP EBITDA on your financial statements. Buyers calculate "adjusted EBITDA" by adding back one-time expenses, owner perks, above-market salaries for family members, and other discretionary costs. I've seen adjusted EBITDA come in 20-30% higher than reported EBITDA, which directly translates to a higher purchase price.

Discounted Cash Flow Method (DCF)

DCF is the most theoretically sound valuation method, but it's also the most complex and subjective. I've only seen it used in larger deals or when a business has unpredictable earnings that will normalize over time.

The formula: Business Value = Sum of Projected Future Cash Flows / (1 + Discount Rate)^Year

Here's how it works: you project the business's free cash flow for the next 5-10 years, then discount those future dollars back to today's value using a discount rate (usually 15-25% for small businesses to account for risk).

Example: if your business will generate $100K in year one, $120K in year two, and $150K in year three, you calculate the present value of each year's cash flow and add them up. The discount rate reflects risk-higher risk means a higher discount rate, which lowers the valuation.

Most small business sellers don't use DCF because it's too easy to manipulate the assumptions. Buyers can justify almost any number by tweaking growth rates or discount rates. It's more common in corporate M&A where both sides have finance teams arguing over projections.

That said, understanding DCF helps you think like sophisticated buyers. They're asking: what cash will this business generate over its lifetime, and what's that worth today? If you can't articulate a clear path to growing free cash flow, you'll struggle to command a premium multiple regardless of which formula the buyer uses.

DCF calculations also include a terminal value-what the business is worth at the end of your projection period. Terminal value often represents 60-80% of the total DCF valuation, which is why buyers obsess over long-term sustainability. A business with declining margins or increasing customer acquisition costs will see its terminal value (and total valuation) crater.

The discount rate selection is where buyers and sellers battle. Sellers want a low discount rate (8-12%) to maximize present value. Buyers want a high discount rate (20-30%) to account for risk. The final rate depends on factors like revenue concentration, competitive moat, management team strength, and market conditions. Understanding how discount rates affect valuation gives you leverage in negotiations.

Asset-Based Valuation (Last Resort)

This method values a business based on the fair market value of its assets minus liabilities. It's typically used for companies that aren't profitable or are being liquidated.

The formula: Business Value = Total Assets - Total Liabilities

You inventory everything the business owns-equipment, inventory, real estate, intellectual property, customer lists-and subtract what it owes. This gives you book value or liquidation value depending on how you price the assets.

I've never sold a business using asset-based valuation because it almost always produces the lowest number. It ignores goodwill, customer relationships, brand value, and earning power. The only time it makes sense is if you're selling a business that's bleeding cash and the buyer just wants the assets.

However, asset-based valuation does provide a floor value-the absolute minimum a business is worth. Even if operations are struggling, tangible assets have value. Real estate, equipment, inventory, and intellectual property can be sold separately if necessary. Smart sellers use this as their walk-away number in negotiations.

There are two approaches to asset valuation: book value and liquidation value. Book value uses the balance sheet values, which may be artificially low due to depreciation. Liquidation value estimates what you'd actually receive if forced to sell quickly. The gap between these numbers can be substantial-equipment with a book value of $100K might fetch $200K at fair market value but only $50K in a fire sale.

Comparable Company Analysis (The Market Approach)

One method I didn't cover in my original exits but have seen used extensively is comparable company analysis-sometimes called "comps" or the market approach. This method looks at what similar businesses have sold for and applies those multiples to your company.

The concept: Find 3-5 businesses in your industry that recently sold, determine the multiple of earnings or revenue they commanded, then apply the median multiple to your metrics.

For example, if three agencies in your market sold for 3.5x, 4.0x, and 4.2x SDE, you'd use roughly 4.0x as your starting point. This method is popular with brokers because it's easy to explain to clients and anchors expectations to real market transactions.

The challenge with comps is finding truly comparable businesses. Two companies might be in the same industry but have completely different business models, customer types, growth rates, and risk profiles. A buyer who says "we can only pay 3x because that's what the last company sold for" is either uninformed or negotiating dishonestly. Every business is unique.

When using comps, adjust for differences. If the comparable business had 50% gross margins and yours has 70%, you deserve a premium. If they were growing 10% and you're growing 40%, add another point to the multiple. The market approach gives you a starting range, but the final number depends on your specific strengths and weaknesses relative to peers.

Which Formula Should You Actually Use?

Here's my practical breakdown based on what I've seen work:

Use SDE multiple if: You're a small business owner doing under $5M revenue, you're heavily involved in operations, and you're selling to an individual buyer or small investor.

Use revenue multiple if: You run a SaaS business, subscription model, or high-growth company where profit is being reinvested and buyers care more about market position than current earnings.

Use EBITDA multiple if: You have professional management in place, you're doing $2M+ in revenue, and you're talking to private equity or strategic acquirers.

Use DCF if: Your business has lumpy earnings that will smooth out, you're negotiating with sophisticated buyers, or you need to justify a premium valuation based on future potential.

Use asset-based if: Your business isn't profitable and you're essentially selling the parts.

Use comparable company analysis if: You want to anchor negotiations to recent market transactions and establish a baseline valuation range.

The Real Variables That Change Your Multiple

The formula is only half the equation. The multiple you get depends on factors buyers obsess over:

Customer concentration: If your top 3 clients represent more than 40% of revenue, expect a 1-2x multiple haircut. Buyers fear customer loss risk. I've seen businesses with great margins and growth trade at discount multiples purely because of concentration. The solution? Diversify aggressively 2-3 years before exit.

Revenue quality: Recurring revenue from contracts beats one-time project work. Monthly subscriptions beat annual contracts. Prepaid beats net-30 terms. The more predictable your cash flow, the higher your multiple. A business with 80% recurring revenue will command a 30-50% higher multiple than an identical business with 80% project-based revenue.

Owner dependence: If the business falls apart when you leave, you're selling a job, not a business. Document everything, build systems, delegate sales and delivery. I spent 18 months removing myself from daily operations before my biggest exit. That preparation alone added 1.5x to my multiple.

Growth trajectory: Flat revenue gets average multiples. Growing 20%+ annually can add 1-2x to your multiple. Declining revenue cuts it in half. Buyers pay for momentum. Even modest growth (10-15%) signals product-market fit and gives buyers confidence they can scale further.

Gross margin: High-margin businesses (60%+) command premium multiples because they're more defensible and scalable. Low margins mean you're competing on price, which buyers hate. Margin expansion over time is even better-it proves you have pricing power and can drive profitability as you grow.

Market conditions: Valuation multiples fluctuate with the broader market. During the low-interest environment of the early part of this decade, SaaS multiples hit 15-20x revenue. Today, they've normalized to 4-8x for most private companies. You can't control macro conditions, but you can time your exit to catch favorable windows.

Buyer type: Strategic buyers (companies in your industry) pay more than financial buyers (private equity) because they can realize synergies. Individual buyers pay the least because they're buying themselves a job. Same business, three different valuations depending on who's writing the check.

I've walked through the specifics of preparing for exit inside my coaching program, including how to structure deals and negotiate terms.

I cover this more here:

How to Calculate Your Own Business Value

Grab your profit and loss statement for the last 12 months. Here's the step-by-step:

Step 1: Calculate SDE. Take net profit, add back your salary, add back owner expenses (your car payment, health insurance, that conference in Hawaii), add back one-time costs (lawsuit, equipment purchase), add back interest, taxes, depreciation, and amortization. That's your SDE.

Step 2: Pick a conservative multiple. If you're a service business with no recurring revenue and you're the rainmaker, use 2-2.5x. If you have recurring revenue, documented processes, and a team that runs without you, use 3-4x. Be honest with yourself.

Step 3: Multiply. SDE × Multiple = Estimated Value.

For example: $200K SDE × 3.5 multiple = $700K estimated value.

That's your starting point. A broker or buyer will tear it apart and adjust for risk factors, but at least you're in the ballpark.

When performing this calculation, understand which add-backs are legitimate and which will get challenged. Owner salary? Absolutely add it back. Your spouse's $80K salary for answering phones twice a week? Buyers will scrutinize that. One-time legal fees from a lawsuit? Add it back. "One-time" marketing expenses you incur every year? That's an operating expense.

Be prepared to defend every adjustment with documentation. Sophisticated buyers will audit your add-backs during due diligence. If they find inflated numbers, they'll reduce the purchase price or walk away entirely.

Understanding Business Broker Fees and Costs

When you're ready to sell, you'll likely work with a business broker or M&A advisor. Understanding their fees is crucial for calculating your net proceeds.

Business brokers typically charge a success fee ranging from 8-12% of the final sale price for businesses under $1M. For larger businesses ($1M-5M), brokers often use the "Double Lehman" or "Modern Lehman" formula: 10% on the first million, 8% on the second, 6% on the third, and so on.

Some brokers charge upfront retainer fees ($5K-50K+) in addition to success fees, particularly for middle-market deals ($5M+). Others work purely on commission. The benefit of a success-only model is alignment-the broker only makes money if you do. The downside is they may push you toward a quick sale rather than holding out for maximum value.

Are brokers worth their fees? In my experience, yes-if you choose the right one. A good broker brings buyer networks you don't have access to, handles the grueling diligence process, negotiates terms you wouldn't know to ask for, and keeps deals from falling apart at the finish line. I've never regretted paying a broker fee on any exit.

That said, broker fees are negotiable. If you bring your own buyer, many brokers offer discounts. If your business is highly marketable or at the upper end of their range, you can often negotiate the percentage down. Just remember that the cheapest broker isn't always the best-I'd rather pay 10% to someone who adds 20% to my sale price than pay 5% to someone who undervalues my business.

The Biggest Mistake Sellers Make

Waiting until you want to sell to start preparing. Buyers don't pay for potential-they pay for proof. If you want a premium multiple, you need 2-3 years of clean financials, documented processes, low customer concentration, and consistent growth.

I started preparing for my exits 18 months before listing. I cleaned up customer contracts, eliminated owner dependencies, systematized operations, and made sure revenue was growing quarter over quarter. That prep work added at least 1x to my multiple in every deal.

If you're serious about selling, grab the 7-Figure Agency Blueprint where I break down the exact steps I took to build sellable businesses. Even if you're not ready to sell today, building a business that's sellable makes it more valuable and easier to run.

Specific prep work that moves the needle: transition key client relationships away from you personally, document standard operating procedures for every role, implement a CRM so customer data isn't in your head, hire a second-in-command who can run daily operations, clean up your financials and move to accrual accounting, and sign long-term contracts with key customers.

Each of these steps might take 6-12 months to execute properly. If you wait until you're ready to sell, you'll either accept a lower multiple or delay your exit by years. Start today.

What Buyers Actually Pay For

Forget the formulas for a second. Buyers pay for predictability and upside with limited downside. They want to know the revenue will keep coming, the customers won't leave, and they can grow it without you.

The more predictable your cash flow, the higher your multiple. The more growth levers you've left on the table, the more a buyer will pay to pull them. The less dependent the business is on you personally, the safer the investment.

SaaS businesses get higher multiples because monthly recurring revenue is predictable. Agencies with retainer clients get better multiples than project-based shops. Businesses with email lists and inbound lead flow are worth more than those dependent on the founder's network.

If you're building your business with an exit in mind, focus on creating systems that generate leads predictably. I run a B2B email database tool specifically because predictable lead flow is the foundation of a valuable sales process, and buyers love businesses that don't depend on referrals or personal relationships.

Think about it from the buyer's perspective. They're betting hundreds of thousands or millions of dollars that your business will continue performing after you leave. Every dependency on you personally increases their risk. Every documented process and systemized function reduces it. The businesses that sell for premium multiples are the ones buyers can walk into and operate from day one.

From my experience helping companies scale, buyers actually pay for predictable lead flow more than anything else. I've seen businesses built on $3,000 in initial capital-just hiring overseas freelancers and using cold email-grow to consistent monthly revenue that attracted serious buyers. One agency I worked with generated their best sales month ever implementing outbound systems, and six months later their valuation reflected that predictability. The businesses that sell for the highest multiples aren't always the biggest; they're the ones where revenue isn't dependent on hope, referrals, or the founder's Rolodex.

How Industry and Business Model Affect Your Multiple

Not all revenue is valued equally. A dollar of SaaS revenue commands a higher multiple than a dollar of agency revenue, which commands a higher multiple than a dollar of retail revenue. Why? Predictability, scalability, and margin structure.

SaaS businesses have incredible unit economics once they reach scale. Customer acquisition happens once, revenue recurs monthly, and marginal costs approach zero. This is why software companies command 5-10x revenue multiples while most businesses trade at 3-5x earnings.

E-commerce businesses typically trade at 2-4x earnings because margins are thinner and customer acquisition is ongoing. You can't just acquire a customer once-you need to keep marketing to drive repeat purchases. The exception is subscription box businesses or consumables with automatic reorders, which command higher multiples due to predictable repeat revenue.

Service businesses vary widely. Agencies with retainer clients and documented delivery processes might see 3-5x EBITDA. Consulting firms where the founder is the primary revenue driver struggle to get 2x EBITDA. The difference? Transferability. If the value walks out the door with the owner, there's no business to buy.

Manufacturing businesses trade at 4-6x EBITDA depending on capital intensity, competitive moat, and customer concentration. Distribution businesses see similar multiples. Both benefit from tangible assets that provide a valuation floor, but both face challenges with thin margins and customer stickiness.

One interesting trend: businesses with recurring revenue in traditionally non-recurring industries command massive premiums. A landscaping company with 80% annual maintenance contracts will trade at 2-3x the multiple of a comparable landscaping company doing one-off projects. Buyers value the business model innovation as much as the financial performance.

When to Get a Professional Valuation

If you're just curious what your business might be worth, use the SDE formula above. It'll get you within 20% of reality.

Get a professional valuation when you're 6-12 months from selling, when you're bringing on a partner or investor, or when you're going through a divorce or estate planning situation. Professional valuations cost $3K-$15K depending on business size and complexity.

Most brokers will give you a free opinion of value if you're serious about listing with them. Just know they're incentivized to lowball you so they can sell it quickly and collect their commission. Take broker estimates with a grain of salt.

Professional valuations serve another purpose beyond determining fair market value-they provide third-party documentation you can use for tax purposes, shareholder disputes, or litigation. If you're adding partners or going through any ownership changes, a professional valuation protects everyone involved by establishing a defensible baseline.

Be wary of "desktop valuations" or automated online calculators. These tools use simplistic formulas and industry averages that may not reflect your business's unique characteristics. A proper valuation involves analyzing your financials, interviewing management, assessing market position, and comparing against recent transactions. You get what you pay for.

How to Maximize Your Valuation Multiple

Knowing the formulas is one thing. Executing a strategy to maximize your multiple is another. Here's what actually works:

Build recurring revenue. Convert one-time sales to subscriptions, annual maintenance contracts, or retainers. Even adding 20-30% recurring revenue to a project-based business can boost your multiple by 0.5-1x.

Reduce customer concentration. If your top 3 clients represent more than 30% of revenue, focus obsessively on adding new customers. Decline to take on any client that would exceed 10-15% of your total revenue. This protects your multiple.

Document everything. Create operations manuals, process documentation, and training materials. The goal is to make yourself replaceable. I know that sounds counterintuitive, but buyers pay premiums for businesses that run without the owner.

Clean up your financials. Move from cash to accrual accounting. Separate personal and business expenses completely. Get annual audited or reviewed statements if your revenue exceeds $2M. Buyers trust clean books and discount aggressively for sloppy accounting.

Build a management team. Hire a general manager, operations director, or COO who can run day-to-day operations. This immediately signals that the business isn't dependent on you and usually adds 1x to your multiple.

Focus on margin expansion. Growing revenue is good; growing revenue while expanding margins is exceptional. It proves you have pricing power and operational leverage. Buyers will extrapolate that trend and pay premiums accordingly.

Create proprietary assets. Intellectual property, proprietary technology, unique databases, or exclusive partnerships increase defensibility and justify higher multiples. These assets represent moats that competitors can't easily replicate.

Every one of these improvements takes time to implement. You can't manufacture them three months before listing your business. The best time to start was three years ago. The second best time is today.

Want to maximize your multiple? Build systems that work without you. I started flat broke-over $40,000 in debt after a startup collapsed-and had to rebuild using nothing but cold email. What I learned is that businesses with documented, repeatable outbound systems sell for higher multiples because buyers can see exactly how leads turn into revenue. If you're sending a few dozen emails a week with proven templates and hitting consistent response rates, that's worth more than an extra million in revenue that came from the founder's personal relationships. Document everything, measure your benchmarks, and make your lead generation transferable.

What About Lead Generation and Sales Systems?

One often-overlooked value driver is your lead generation and sales infrastructure. Businesses with predictable, scalable lead generation systems command higher multiples than those dependent on founder relationships or referrals.

When building a sellable business, invest in systematic lead generation. That might mean SEO and content marketing, paid advertising with proven unit economics, partnerships and referral programs with clear economics, or outbound sales with documented playbooks.

If you're in B2B, having a clean database of prospects and documented outreach processes matters. Tools like email finders and email validators help you build repeatable prospecting systems that a buyer can take over from day one.

The businesses I sold for the highest multiples all had one thing in common: the buyer could see exactly how to generate more customers. I didn't just hand them a customer list-I handed them the entire system for acquiring those customers, complete with costs, conversion rates, and playbooks.

Check out the Discovery Call Framework for more on building repeatable sales processes. Buyers pay premiums for businesses where growth is systematic rather than accidental.

Let me be direct: if you're building a business on referrals alone, you're leaving millions on the table-both in growth and in exit valuation. I've watched this play out dozens of times. Even if you're working with massive clients like Sony, waiting for them to refer you is a waste of potential. Instead, you should be using those client names in outbound to generate 3-4 more referrals per deal. One software company I advised went from zero to $3,000 in monthly revenue just by sending cold emails about their basic MVP. That systematic approach to lead generation became their most valuable asset when it came time to discuss valuation.

The Role of Market Timing in Valuation

Even the best business can sell for less than it's worth if you hit the market at the wrong time. Valuation multiples expand and contract with economic conditions, interest rates, and capital availability.

During periods of low interest rates and abundant capital, buyers compete aggressively and multiples climb. When rates rise and capital tightens, multiples compress. The swing can be dramatic-SaaS multiples peaked at 15-20x ARR in late 2021 and fell to 4-8x by mid-2023.

You can't predict market cycles perfectly, but you can position yourself to move quickly when conditions are favorable. Keep your financials clean, your operations documented, and your growth trajectory positive. When you see multiples expanding in your industry, that's your signal to move fast.

Also consider seasonal factors. Most businesses see acquisition activity spike in Q1 and Q3 when buyers are active and capital deployment deadlines approach. Summer and late December are typically slower. If you can influence timing, target closing in March-April or September-October when buyer interest peaks.

Preparing for Due Diligence

The valuation formula gets you to a letter of intent. Due diligence determines whether the deal actually closes at that number. Buyers will scrutinize every aspect of your business, and any problems they find get deducted from the purchase price.

Common due diligence discoveries that reduce valuations: customer contracts that aren't actually signed, revenue recognition issues that overstate earnings, key employees who plan to leave, pending lawsuits or regulatory issues, IP that isn't properly protected, and vendor relationships that are at risk.

I lost $50K off one exit when the buyer discovered a key vendor relationship was based on a handshake rather than a written contract. The buyer assumed (correctly) that they'd need to renegotiate and discounted the valuation accordingly.

Prepare for due diligence 6-12 months before you list by conducting an internal audit. Get all contracts signed and in order. Document all vendor and customer relationships. Clean up any legal or regulatory loose ends. Organize your financials in a clean data room. The cleaner your due diligence package, the smoother your exit and the less room buyers have to renegotiate.

Final Thoughts on Valuation Formulas

The formula that matters most is the one your buyer uses. Your job is to understand what buyers in your industry care about and optimize your business for those metrics 2-3 years before you sell.

If you're in SaaS, grow ARR and reduce churn. If you're in services, build recurring revenue and eliminate customer concentration. If you're running an agency, document your processes and build a team that doesn't need you day-to-day.

The businesses that sell for premium multiples aren't accidents. They're built with the exit in mind from day one. Whether you plan to sell next year or in 10 years, running your business like it's for sale makes it more profitable, less stressful, and ultimately more valuable.

Start by calculating your current valuation using the SDE method above. Then identify the top three constraints holding back your multiple-usually some combination of customer concentration, owner dependence, or revenue quality. Spend the next 12-18 months systematically addressing those constraints.

Every point you add to your multiple is life-changing money in your pocket at exit. A business worth $500K at 3x SDE is worth $1M at 6x SDE. Same business, same cash flow, double the exit-purely because you understood what buyers value and optimized accordingly.

That's the real formula for business valuation: build the kind of business sophisticated buyers want to own, prove it with numbers over multiple years, and time your exit to catch favorable market conditions. Master that, and the specific valuation formula becomes almost irrelevant. The buyers will compete, and competition drives price more than any formula ever will.