How to Do a Business Valuation (Step-by-Step)

Why Most Founders Get This Wrong

When I started thinking about my first exit, I made the same mistake most founders make: I asked the wrong question. I wanted to know what my business was worth, when the real question is what a buyer will pay - and those two numbers are very different depending on how prepared you are.

Business valuation is not a single formula. It is a negotiation anchored by data. The method you use, the number you start with, and the story you tell around the financials all determine whether you walk away with a number you're proud of or one that makes you wish you'd spent another 12 months cleaning things up first.

I've been through this process five times now with SaaS companies, agencies, and service businesses. This guide is what I wish someone had handed me before my first deal.

What Is a Business Valuation (and When Do You Need One)?

A business valuation is a formal assessment of what your company would sell for on the open market. It factors in your financials, your growth trajectory, your customer base, your management structure, and the risk profile a buyer sees when they look at your P&L.

Founders typically run a valuation in a handful of situations: preparing for a full exit, bringing on a partner, raising outside capital, settling a dispute, or simply benchmarking where they stand. Most people only think about it when they're ready to sell - which is already too late to do anything about the number. The founders who get top-of-range multiples started running their valuation math 12-24 months before they ever called a broker.

There are also situations where a third-party certified appraiser is required. In the United States, business valuations for financing or legal purposes are typically carried out by a professional who is Accredited in Business Valuation (ABV) - a certification awarded by the AICPA to CPAs who pass a qualifying exam. If you're seeking financing from lenders or venture capital, you may need an ABV-certified professional. If you're trying to understand your range before a sale, you can run the numbers yourself using the methods below.

The Five Valuation Methods You Need to Know

Most small-to-mid-market business transactions come down to a handful of methods. Here's a clear breakdown of all five so you understand how buyers think - and which one applies to your situation.

1. SDE Multiple (Seller's Discretionary Earnings)

This is the standard for owner-operated businesses where you - the founder - are still actively running day-to-day operations. SDE is calculated by taking your net profit and adding back your owner's salary, personal perks run through the business, depreciation, amortization, one-time expenses, and any non-cash charges.

The formula looks like this: SDE = Net Profit + Owner Salary & Benefits + Non-Cash Expenses + One-Time/Non-Recurring Expenses

For very small businesses under $500K in earnings, SDE multiples typically run 2x-3.5x. For owner-operated businesses generally, the range is 2x-4.5x SDE. The transition from SDE to EBITDA multiples generally occurs around the $1-2 million earnings threshold - when the business has grown large enough that a professional management team replaces the owner's operational role. Using EBITDA multiples on a business that should be valued on SDE, or vice versa, produces a materially inaccurate result. If you're running a lean, profitable business with solid systems and recurring revenue, you're shooting for the top of that band.

2. EBITDA Multiple

Once your business has a real management layer - meaning it doesn't fall apart if you take a month off - buyers shift to EBITDA. This normalizes earnings by stripping out interest, taxes, depreciation, and amortization, making it easier to compare your business to others in your space.

Businesses with hired management at $1M+ EBITDA are typically valued at 4x-10x EBITDA. Digital agencies with strong recurring revenue and proprietary processes can reach 6x-12x EBITDA. The higher you go on that range, the more your business looks like a system rather than a job.

The key word is adjusted EBITDA. Common add-backs include excess owner compensation above a market-rate replacement salary, one-time legal fees, non-recurring consulting costs, and personal expenses run through the P&L. Buyers and their accountants will scrutinize every add-back, so document everything. Businesses with recurring revenue, diversified customer bases, and strong margins can reach the upper end of the range, while owner-dependent, lower-margin businesses may trade at the lower end.

3. ARR Multiple (SaaS and Subscription Businesses)

If you're running a SaaS company or any subscription business with predictable Annual Recurring Revenue, buyers often skip EBITDA entirely and value you on a multiple of ARR. This is especially true for growth-stage companies that are reinvesting heavily and showing low profit on paper. Revenue multiples apply when current EBITDA understates future earning power - which is the defining characteristic of high-growth SaaS.

For smaller SaaS companies, ARR multiples typically run 3x-8x. Mid-to-large companies with consistent growth can achieve higher multiples depending on churn, gross margin, and market size. A company growing 60% year-over-year with sub-2% monthly churn gets a very different multiple than one growing 10% with high churn.

There's also the Rule of 40 benchmark worth knowing: your revenue growth rate plus your profit margin should exceed 40%. Companies that clear this threshold are seen as healthily balancing growth and profitability, and it translates directly into a higher multiple.

4. Discounted Cash Flow (DCF)

DCF is what buyers use as a sanity check on their multiple-based valuation - and it's the method you need to understand if you want to hold your own in a sophisticated deal conversation. The concept is straightforward: a dollar of earnings today is worth more than a dollar three years from now. DCF calculates what your projected future cash flows are worth in today's money.

Here's the basic process: First, you project your free cash flows out over a 5-year period. Then you apply a discount rate - essentially the required rate of return a buyer expects given the risk of your business. Discount rates for small privately held businesses typically run higher than for public companies, often in the 15-30% range, because of the illiquidity premium and concentration risk. Finally, you calculate a terminal value - the estimated worth of the business beyond the forecast period - using either a perpetual growth assumption or an exit multiple applied to final-year earnings.

The honest limitation of DCF for small businesses is that it's highly sensitive to your assumptions. A 1-2% shift in either direction in your discount rate can significantly change the final valuation. Without stable historical data, even a well-structured model can be speculative. That's why buyers in the lower middle market anchor on EBITDA or SDE multiples and use DCF as a cross-check rather than the primary anchor. Still, if you're walking into a deal conversation, you need to understand the logic - because sophisticated buyers will use it against you if you don't.

5. Asset-Based Valuation

The asset-based approach values a business by looking directly at the balance sheet: what you own minus what you owe. The formula is simple - total assets minus total liabilities - but the inputs need to be adjusted from book value to fair market value to mean anything.

This method is most commonly used for asset-heavy businesses: manufacturing companies, real estate holding companies, or businesses facing distress or closure. For a service business, a digital agency, or a SaaS company, asset-based valuation is usually the floor, not the ceiling - it tells you the minimum a buyer could recover if they broke the business apart. The Adjusted Net Asset Method allows a buyer to establish a floor value based on the amount that would be realized upon sale of the company's assets after satisfying its liabilities.

Where asset-based valuation matters in practice for online businesses and agencies: IP, proprietary software, customer lists, and documented processes all add to adjusted net asset value. If you've built proprietary tooling or have contracts with assigned value, make sure your advisor captures it.

How to Calculate Your SDE Step by Step

Let's make this concrete. Here's the process I walk through when thinking about one of my own businesses:

1. Pull your P&L for the trailing 12 months. Use actual numbers, not projections. Buyers anchor on what you've already done.
2. Start with net profit. This is your bottom line after all expenses.
3. Add back your total owner compensation. That includes salary, health insurance, retirement contributions, and any car or travel expenses with your name on them.
4. Add back one-time expenses. Did you hire a consultant for a rebrand? Pay a one-time legal fee? Those aren't recurring costs - add them back.
5. Add back depreciation and amortization. These are non-cash expenses and don't reflect real cash out the door.
6. Subtract one-time revenue windfalls. If you landed a single massive contract that won't repeat, buyers will discount it. Be honest about this or it comes out in due diligence and destroys trust.
7. Multiply by your applicable multiple. Use comp data from your industry to anchor the range, then push toward the high end with your quality factors.

The process of cleaning up the financial statements like this is called "recasting" or normalizing. Get comfortable with it - you'll do it multiple times before any serious buyer conversation.

A quick example: a business generating $400,000 in SDE transacting at a 2.5x multiple implies a value of $1,000,000. That same business cleaned up to show $450,000 in SDE (by properly documenting add-backs) at a 3x multiple is worth $1,350,000. The paperwork matters.

What Actually Moves Your Multiple

This is where most sellers leave money on the table. Two businesses with identical SDE can command very different multiples based on qualitative factors that buyers price as risk. Here are the five biggest levers:

• Owner Dependence. If the business stops without you, buyers apply a discount. Build processes, hire operators, and document your systems before you go to market. Check out the 7-Figure Agency Blueprint if you're building toward a scalable, sellable operation - it covers the operational infrastructure that buyers reward.
• Recurring Revenue. Retainers, subscriptions, and annual contracts all increase your multiple. Project-based revenue introduces uncertainty that buyers price downward. One of the best things you can do before an exit is convert as much revenue to recurring as possible.
• Customer Concentration Risk. When one client accounts for more than 25% of revenue, buyers apply a discount to the multiple because of concentration risk. Diversify your client base before you go to market.
• Long-Term Contracts. Long-term contracts with auto-renewal clauses strengthen valuation significantly. A business with 80% of revenue locked into 12-month contracts is far more attractive than one relying on month-to-month relationships.
• Growth Trajectory. Buyers pay premiums for businesses showing consistent growth because it signals market demand and scalability. Flat or declining revenue creates anxiety, even if current earnings look good.

The Comparable Sales Approach

The multiples method values a business based on what comparable businesses have actually sold for. Instead of pulling a number from thin air, you anchor your valuation to real transaction data from your industry and size range.

Good sources for comp data include Flippa (great for online businesses and SaaS), BizBuySell for traditional businesses, and industry-specific M&A advisors who track deal flow in your vertical. The honest answer is that multiples vary by industry, market conditions, and the specifics of your company - so don't rely on a single data point.

In practice, buyers run two or three valuation methods and triangulate. They'll anchor on the EBITDA or SDE multiple, use a DCF as a sanity check on growth assumptions, and sometimes use an asset-based floor if there's meaningful equipment or IP involved. Know how they think and you can present your numbers in the most favorable light.

Industry-Specific Valuation Rules of Thumb

Beyond the universal methods above, certain industries have their own shorthand that buyers and brokers use. Understanding the rule of thumb for your vertical helps you quickly benchmark whether a deal is in the right range - or way off.

• Digital agencies: Typically 3x-6x SDE for owner-operated shops; 6x-10x EBITDA for those with a full management layer and strong recurring retainer revenue.
• SaaS (under $1M ARR): Often 3x-5x ARR, heavily influenced by churn rate, growth rate, and gross margin. High churn crushes the multiple regardless of revenue.
• E-commerce / DTC brands: Usually 0.5x-2.0x revenue or 3x-5x EBITDA, depending on brand defensibility, supplier concentration, and platform risk (i.e., how dependent are you on a single channel like Amazon or Meta ads).
• Professional services (accounting, legal, consulting): Often 0.9x-1.4x revenue as a rule of thumb, though quality of client relationships and contract length matter enormously here.
• Local service businesses (HVAC, plumbing, home services): Typically 3x-6x EBITDA. Home services businesses have been getting strong buyer attention from private equity roll-up buyers, which has pushed multiples up for well-run operators.

These rules of thumb are starting points, not ceilings. Every factor that reduces risk to the buyer - recurring revenue, documented processes, diversified clients - pushes your actual deal above the industry median.

Enterprise Value vs. What You Actually Take Home

One of the most important concepts that founders miss is the difference between enterprise value and the cash that hits your bank account after a deal closes. These numbers are rarely the same.

Enterprise value is calculated from earnings times multiple. But what you actually receive depends entirely on deal structure. Here's what compresses the real number:

• Earnouts. A portion of your purchase price may be contingent on hitting post-close revenue or EBITDA targets. Earnouts can be a significant percentage of the total deal value, and they carry execution risk after you've given up control.
• Seller Financing. Buyers often ask sellers to hold a note for 10-20% of the purchase price, paid over 2-3 years. If the business underperforms post-close, collecting can get complicated.
• Working Capital Adjustments. Most deals include a working capital target at close. If your business closes with less working capital than agreed, the purchase price is adjusted down. This catches unprepared sellers off guard.
• Debt Payoffs. Any business debt - lines of credit, equipment loans, SBA loans - typically gets settled from the proceeds at close. Enterprise value minus debt equals equity value, which is what you walk away with.
• Transaction Costs. Broker fees typically run 8-12% of deal value at the lower end of the market. Add legal, accounting, and quality-of-earnings report costs and you're looking at a meaningful reduction in net proceeds.

Run the math on net proceeds - not enterprise value - before you get emotionally anchored to a headline number. I've seen founders mentally spend money from an LOI that looked much smaller once deal costs, earnouts, and working capital adjustments were factored in.

What to Do 12-24 Months Before You Sell

Valuation isn't something you figure out the week before you call a broker. The founders who get top-of-range multiples are the ones who spent at least a year engineering their exit. Here's the short list of moves that matter most:

• Get your books clean. Auditable financials with accurate reporting are non-negotiable. Messy books kill deals or force price reductions during due diligence.
• Document your processes. Use a tool like Trainual to turn tribal knowledge into documented SOPs. This directly reduces perceived owner dependence.
• Build a management layer. Hire or promote someone who can run day-to-day operations without you. This single move can shift you from an SDE deal to an EBITDA deal - a meaningful jump in multiple range.
• Reduce customer concentration. Add clients aggressively in the 12-18 months before going to market. If you need a systematic approach to filling your pipeline, grab the Discovery Call Framework - it's the exact process I use to qualify and close new business.
• Convert project revenue to retainers. Productize your services, introduce monthly plans, and lock clients into longer contracts with auto-renewal.
• Increase EBITDA margins. Audit every line of your P&L for non-essential spend. A dollar of profit improvement is worth 4x-8x at exit.
• Run the valuation math quarterly. Don't wait until you're ready to sell to know your number. Know your SDE, know your applicable multiple range, and actively track which levers are moving it.

Common Valuation Mistakes That Cost Founders Money

After five exits, I've seen the same errors come up over and over:

• Using revenue instead of earnings as the anchor. Revenue is vanity. Buyers care about what's left after you pay for everything. A $5M revenue business with 10% margins gets a fraction of what a $2M revenue business with 40% margins gets.
• Ignoring add-backs. Every dollar of legitimate add-back increases your SDE, which gets multiplied. A $50K add-back at a 4x multiple is $200K more in your pocket.
• Going to market too early. If your trailing 12-month numbers are your worst in three years, wait. Buyers anchor on what they see, and a bad recent year tanks the deal even if you have a great story about why it happened. The right time to sell is when your business is at its operational peak - not when you're trying to time market conditions.
• Confusing enterprise value with cash in hand. Enterprise value is calculated from earnings times multiple. What you actually receive depends on deal structure - earnouts, seller financing, working capital adjustments, and debt payoffs all affect the real number.
• Not talking to multiple buyers. Competition drives price. One LOI is a negotiating weakness. Multiple LOIs are leverage.
• Skipping a quality-of-earnings report. Sophisticated buyers will commission a QoE to validate your add-backs. If you haven't already stress-tested your own recasting, their accountants will find the holes - and use them to renegotiate price. Run your own QoE-level review before you go to market.
• Letting the deal take too long. Most deals take 6-12 months from LOI to close. In that time, your trailing 12-month numbers will update. A business that was growing when you signed the LOI but is flat by close will face a price chip. Keep growing throughout the process.

How to Find Comparable Transaction Data

One of the most underrated steps in preparing a valuation is finding real deal data - not just generic industry ranges you read in an article. Multiples in your specific niche can vary significantly from the broad category averages.

A few places to look:

• Flippa - The largest marketplace for online businesses. You can browse sold listings and see actual transaction data for SaaS, content businesses, and agencies. Filter by revenue range and business type to get relevant comps.
• BizBuySell Insight Reports - Published quarterly, covering median sale prices and multiples across business categories. Useful for traditional and local service businesses.
• Industry-specific M&A advisors - If you're in a niche vertical (dental, HVAC, insurance agencies), there are boutique brokers who specialize in your space. They've closed dozens of deals and know exactly where the market is pricing your type of business right now. A single conversation with the right broker is worth more than hours of Googling.
• Your accountant or CFO advisor - A fractional CFO who's worked on transactions in your space will have real deal data and can help you build a defensible recasted P&L before you talk to buyers.

The goal is to walk into every buyer conversation with two or three real transaction comps that anchor your ask. When a buyer tries to lowball you, you can point to specific precedent transactions - not just assert that your business is worth more.

Putting It All Together

Business valuation is a skill, and like any skill, the more you engage with it before you need it, the better your outcome. Don't wait until you're ready to sell to figure out what your business is worth. Run the numbers quarterly, know your multiple range, and actively work on the levers that move it upward.

The five methods - SDE multiples, EBITDA multiples, ARR multiples, DCF, and asset-based valuation - each serve a different purpose. For most founder-owned businesses, SDE or EBITDA multiples anchored against comparable transaction data is the practical starting point. DCF is your cross-check. Asset-based valuation is your floor. Knowing all five means you can hold your own in any room.

If you're at the stage where you're seriously prepping for an exit and want to work through the strategy hands-on, I go deeper on this inside Galadon Gold - including how to structure the conversation with buyers and what to have ready before the first call.

The founders who win at exit aren't necessarily the ones with the biggest businesses. They're the ones who understood the math early, built accordingly, and showed up to the negotiation table knowing exactly what their number should be - and why.