How to Determine Business Valuation (From 5 Exits)

The Valuation Methods That Actually Matter

I've sold five SaaS companies. Every time, the valuation conversation started with theory and ended with what a buyer would actually wire to my account. The gap between those two numbers taught me more than any finance textbook.

There are four primary methods to determine business valuation, and which one matters depends entirely on your business size, profitability, and who's buying. But before we dive into the formulas, understand this: your business is worth what someone will pay for it on the day they wire the money. Everything else is an educated guess wrapped in spreadsheets.

Revenue Multiple Method

This is the simplest and most common for small to mid-sized businesses. You take your annual revenue and multiply it by an industry-standard multiple. SaaS companies typically trade at 3-6x annual recurring revenue, service businesses at 0.5-2x revenue, and ecommerce at 1-3x revenue.

The multiple depends on growth rate, churn, profit margins, and how systematized the business is. A SaaS product with 10% monthly growth and negative churn gets a higher multiple than a flat consulting business where the founder does all the work.

When I sold my first company, we were doing $800K ARR with 15% month-over-month growth. The buyer paid 4.2x because the growth was documented and repeatable. My third exit was a lifestyle business doing $1.2M revenue but barely growing-that one sold for 1.8x.

The revenue multiple method works because it's fast and easy to calculate, but it ignores profitability completely. A business doing $2M in revenue but losing money every month isn't worth $6M just because the industry average is 3x. Reality kicks in fast when buyers start looking at your actual margins.

Seller's Discretionary Earnings (SDE) Multiple

SDE is profit plus owner compensation plus owner benefits. This method works best for small businesses under $5M in revenue where the owner is actively involved.

You calculate SDE by taking net profit and adding back: your salary, your health insurance, your car payment if it runs through the business, that trip to the conference in Hawaii, and any other expenses that a new owner wouldn't have.

Then you multiply SDE by a factor typically between 2-4x depending on the business type and risk profile. A lawn care company with 50 recurring clients might sell for 3x SDE. A dropshipping store with zero brand recognition might get 1.5x SDE if you're lucky.

The SDE method reflects what buyers actually care about: how much cash they can pull out of the business after they buy it. If your SDE is $200K and the multiple is 3x, you're looking at a $600K valuation. This assumes the buyer can step in and run the business at roughly your cost structure, which is why add-backs matter so much.

EBITDA Multiple Method

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the standard for larger businesses, typically $5M+ in revenue. This is what private equity firms and strategic acquirers use.

Unlike SDE, EBITDA assumes you'll hire a replacement operator, so your salary isn't added back-it's already accounted for as a real expense. EBITDA multiples range from 3-8x for most main street businesses, and 8-15x+ for high-growth tech companies.

The higher your EBITDA, the higher the multiple. A business doing $500K EBITDA might trade at 4x. A business doing $5M EBITDA might get 7x. Buyers pay more for scale because there's less risk and more strategic value.

I crossed into EBITDA territory with my fourth exit. We were doing $6.8M revenue with $1.9M EBITDA. The acquirer was a strategic buyer who valued the technology and customer list at 6.5x EBITDA, which came out to $12.35M. That's when I learned the difference between selling to an individual versus selling to a company with acquisition capital.

Asset-Based Valuation

This method adds up everything the business owns-equipment, inventory, intellectual property, customer lists, domain names-and subtracts liabilities. It's most relevant for asset-heavy businesses like manufacturing or retail.

For digital businesses, asset-based valuation usually produces the lowest number because your "assets" are a website, some code, and a customer list. But it sets a floor. Even a dying business has some liquidation value.

I've never sold a company using asset-based valuation as the primary method, but I've seen it used as a sanity check. If your revenue multiple suggests a $2M valuation but your assets are worth $150K, the buyer knows they're paying for future cash flow, not tangible property.

Asset-based valuation becomes more important if you own real estate, manufacturing equipment, or significant inventory. A machine shop with $800K in equipment and $200K in raw materials has a hard floor of asset value, even if the business operations are struggling.

Discounted Cash Flow Analysis: The MBA Method

Discounted cash flow (DCF) analysis is the method business school professors love and practitioners rarely use for small business valuations. But you should understand it because sophisticated buyers might reference it.

DCF projects your future cash flows over a specific period-usually 5-10 years-and then discounts those future dollars back to present value. The logic is simple: a dollar today is worth more than a dollar five years from now because of risk and opportunity cost.

You estimate annual cash flow for each year, apply a discount rate (typically 10-25% depending on risk), and sum up the present value of all those future cash flows. Add a terminal value for what the business might be worth at the end of the projection period, and you get your DCF valuation.

Here's why I rarely see this used in practice for small business sales: it requires accurate projections of future performance, which nobody actually has. Buyers discount your projections heavily because every seller claims hockey-stick growth is coming next year.

I've had exactly two buyers try to anchor negotiations with a DCF model. Both times, they used aggressive discount rates and conservative growth projections that produced valuations 30-40% below what the business eventually sold for. DCF gives you a number, but that number is only as good as the assumptions behind it.

Market Comparables: What Are Similar Businesses Selling For

One of the most practical ways to estimate your business value is to look at recent sales of comparable businesses. This is called the market approach or precedent transactions method.

You find businesses similar to yours in size, industry, business model, and geographic market, then look at what they sold for. If three marketing agencies in your revenue range sold for 2.5-3x SDE in the past year, that gives you a solid benchmark for your own valuation.

The challenge is finding good comps. Public companies publish their financials, but most small business sales are private transactions. You have to network with brokers, search marketplaces like Flippa for online businesses, or get access to industry M&A databases.

I use market comps as a reality check on my other valuation methods. If my SDE multiple says my business is worth $2M but similar businesses are selling for $1.2-1.4M, I either need to justify why mine is worth more or adjust my expectations.

Geographic location matters more than most founders realize. A business in a major metro area with a large buyer pool typically sells for a higher multiple than the same business in a rural market with fewer potential acquirers. The liquidity of your local M&A market affects your valuation.

What Actually Drives Your Multiple Higher

The method matters less than the factors that push your multiple up or down within that method. Here's what I've seen move the needle in actual negotiations.

Recurring Revenue

A $1M business with 90% recurring revenue is worth 3-4x more than a $1M business that has to re-sell every month. Subscription models, retainers, and contracts are worth their weight in gold to buyers.

When I built ScraperCity, I structured it as a subscription SaaS specifically because I knew recurring revenue would command a premium whenever I decided to exit. Every agency I've advised through the 7-Figure Agency Blueprint gets the same advice: convert project work to retainers as fast as possible.

The predictability of monthly recurring revenue reduces buyer risk dramatically. They can model out future cash flows with confidence, which translates directly to a higher purchase price. One-time project revenue gets discounted heavily because there's no guarantee it continues after the sale.

Owner Independence

If you're the business, the business isn't worth much. Buyers pay premiums for systems, documentation, and teams that run without the founder.

Before my second exit, I spent six months removing myself from daily operations. I documented every process, hired a head of sales, and stopped touching customer accounts. The buyer paid 30% more than initial offers because they could see the business would survive without me.

This is the single biggest mistake I see agency owners make. They build a business that completely depends on their personal relationships, expertise, and daily involvement. Then they wonder why buyers offer 1x revenue or walk away entirely.

Customer Concentration

If your top three clients represent 60% of revenue, your valuation takes a hit. Buyers want diversification. A client roster where no single customer exceeds 10% of revenue signals stability.

I lost a deal once because two customers made up 45% of revenue and both were on month-to-month contracts. The buyer walked. I spent four months adding 12 new clients, got concentration down to 18% max per client, and sold it nine months later for 35% more.

Customer concentration is a quantifiable risk. Buyers will either discount your valuation to account for that risk or require an earnout structure where you only get paid if those key clients stick around post-sale.

Growth Trajectory

A flat business gets a flat multiple. A business growing 10-20% annually gets a premium. A business growing 5-10% monthly gets a significant premium.

Document your growth in a spreadsheet. Monthly revenue, monthly profit, customer count, churn rate. Buyers want to see the trend line going up and to the right. Anecdotes don't cut it-you need numbers.

Consistent growth matters more than explosive growth. A business that's grown 15% per year for three straight years is more valuable than a business that grew 80% one year and then flatlined. Predictability reduces risk, and lower risk means higher multiples.

Profit Margins

Two businesses with the same revenue can have wildly different valuations based on margins. A $2M revenue business with 40% margins is worth significantly more than a $2M business with 15% margins.

Buyers care about cash flow, not vanity revenue numbers. High margins signal pricing power, operational efficiency, and room for the buyer to invest in growth without going negative. Low margins suggest you're competing on price, which is a race to the bottom.

Contract Length and Terms

Month-to-month clients are worth less than annual contracts, which are worth less than multi-year agreements. Lock-in reduces churn risk and guarantees future cash flow.

When I'm preparing a business for sale, I focus heavily on converting month-to-month relationships to annual contracts. Even offering a discount to get clients to commit for 12 months is worth it-the valuation bump from contracted revenue more than pays for the discount.

The Valuation Process: How This Actually Happens

Theory is one thing. Here's how valuation actually unfolds when you're trying to sell.

Step 1: Pull Your Financials

You need at least 12 months of profit and loss statements, ideally 24-36 months. If you're doing cash accounting through your personal bank account, stop reading and go hire a bookkeeper. Buyers won't take you seriously without clean books.

Export your revenue data month by month. Calculate your SDE or EBITDA depending on business size. Identify any one-time expenses or income that skew the numbers.

Clean financials aren't optional. I've watched deals crater during due diligence because the seller couldn't produce reliable P&L statements. Buyers assume if your books are messy, you're either hiding something or incompetent. Neither perception helps your valuation.

Step 2: Choose Your Valuation Method

Under $2M revenue? SDE multiple is your friend. Over $5M revenue? EBITDA is what buyers will use. In between? You'll probably hear both and negotiate somewhere in the middle.

Run the math on both if you're in that gray zone. Know your numbers before a buyer brings theirs. I create a simple spreadsheet with all four valuation methods-revenue multiple, SDE multiple, EBITDA multiple, and asset-based-so I can see the range and defend whichever number works in my favor.

Step 3: Research Comparable Sales

Look at what similar businesses have sold for. Flippa is useful for smaller online businesses-you can see actual sale prices and multiples. For larger deals, you'll need to network with brokers or check industry reports.

If you're in the agency world, I cover real exit comps and what buyers are currently paying inside Galadon Gold.

Pay attention to the transaction structure on comps. A $2M "sale price" where $1M is earnout payments contingent on performance is not the same as a $2M cash-at-close deal. Earnouts shift risk to the seller and reduce the real valuation.

Step 4: Adjust for Your Specific Situation

Start with the baseline multiple for your industry and size, then adjust up or down based on your specific strengths and weaknesses.

Strong recurring revenue? Add 0.5-1x to your multiple. Heavy customer concentration? Subtract 0.5x. Fully systematized operations? Add 0.5x. You're the only person who can do the work? Subtract 1-2x or make the business unsellable.

I keep a list of value drivers and value detractors for every business I own. Every quarter, I review what's improving and what's getting worse. That awareness lets me make strategic decisions that compound valuation over time.

Step 5: Get a Professional Opinion

Pay a broker or M&A advisor for a valuation opinion. It costs $2K-$5K for a small business, more for larger deals. This gives you a third-party number to anchor negotiations and shows buyers you're serious.

I've used business brokers for three of my five exits. They're worth it for the market knowledge alone, even if you don't use them to run the sale process. A good broker has closed dozens or hundreds of deals in your industry and knows what buyers are actually paying right now.

Common Valuation Mistakes I See Repeatedly

Overvaluing Potential

Your business is worth what it's doing now, not what it could do if someone just executed your brilliant five-year plan. Buyers discount future projections heavily because they've heard a thousand pitches about untapped potential.

I've watched founders torpedo deals by insisting their $500K revenue business is really worth $3M because they haven't tried paid ads yet. If paid ads were a sure thing, you would have already done them.

Buyers pay for realized value, not hypothetical value. If you have a genuine growth opportunity, prove it by executing for 6-12 months and then sell based on the actual results. Otherwise, you're asking the buyer to pay you for work they're going to do.

Ignoring Churn

High churn kills SaaS valuations. If you're adding 10 customers a month but losing 8, you don't have a $50K MRR business-you have a leaky bucket. Buyers will recalculate your revenue based on net retention and cut your valuation accordingly.

Before my most recent exit, I spent three months fixing our onboarding process and reducing churn from 6% to 2.5% monthly. That single improvement added roughly $800K to the final sale price.

Churn directly impacts the revenue multiple buyers are willing to pay. A SaaS business with 2% monthly churn might get 5-6x ARR. The same business with 8% monthly churn might get 2-3x ARR or be completely unsellable.

Mixing Personal and Business Expenses

If your books are a mess of personal expenses, business expenses, and random stuff you can't explain, buyers will either walk or discount your valuation by 30-40% to account for the risk.

Clean books aren't optional. Use separate bank accounts, separate credit cards, and actual accounting software. The $50/month you spend on bookkeeping will return 100x when you sell.

I've seen sellers lose six-figure valuation bumps because they couldn't cleanly separate their personal travel from business travel or explain why they had 37 different subscriptions charging the business account.

Waiting Until You Want to Sell

Valuation isn't something you figure out when you're ready to exit. You should know your current valuation every quarter so you can make decisions that increase it.

I track the theoretical valuation of every business I own in a simple spreadsheet. Every quarter, I look at what increased it and what decreased it. That awareness has made me more money than any single tactic.

Building a valuable business and building a profitable business require different decisions. Profitable businesses maximize short-term cash. Valuable businesses optimize for metrics buyers care about-recurring revenue, low churn, owner independence, customer diversification. You need to know which game you're playing.

Ignoring the Cap Table

If you have investors, partners, or minority shareholders, they affect your valuation and your take-home proceeds. A $3M valuation sounds great until you realize you only own 60% and your investors have liquidation preferences that eat the first $1M.

Understand your cap table and how proceeds will be distributed before you start valuation discussions. I've seen founders negotiate hard for a higher purchase price only to realize their personal payout barely changed because of how the waterfall worked.

Industry-Specific Valuation Ranges

Here's what I've seen businesses actually sell for across different industries, based on conversations with dozens of founders and my own exits.

SaaS: 3-6x ARR for small products, 8-15x ARR for high-growth companies with strong retention. B2B SaaS gets higher multiples than B2C. Vertical SaaS serving specific industries often commands premium multiples because of the defensibility.

Agencies: 1-3x revenue or 2-4x SDE, depending on how systematized they are. Agencies with retainers and low owner involvement command the higher end. I've seen well-run agencies with strong SOPs and account managers hit 4x SDE when sold to strategic buyers.

Ecommerce: 1.5-3x SDE for most DTC brands, higher if you own unique product IP or have a strong brand moat. Dropshipping stores sell for 1-2x annual profit if they sell at all. Inventory-based businesses get dinged for the working capital required to operate.

Content/Media: 2-4x annual profit for advertising-based models, higher for subscription or product-integrated models. YouTube channels and newsletters with engaged audiences can command 3-5x annual earnings. Newsletters with high open rates and proven product-market fit sell for premium multiples.

Service Businesses: 1-2x revenue or 2-3x SDE. Businesses with blue-collar services and recurring routes (pest control, lawn care, HVAC maintenance) trade at the higher end. Home service businesses with equipment and vehicles have higher asset-based floor valuations.

Lead Generation Businesses: 2-4x annual profit depending on traffic sources and customer concentration. SEO-based lead gen businesses sell for more than paid-ad-dependent businesses because the traffic is more durable. Having proprietary lead sources or systematized prospecting tools adds value by reducing dependency on third-party platforms.

When to Get a Formal Valuation

You don't need a formal valuation every year, but there are specific moments when it's worth paying for professional analysis.

If you're considering selling in the next 12-18 months, get a valuation now. It gives you time to fix the things that are dragging down your multiple. I typically recommend founders start exit prep 18-24 months before they want to sell, and valuation is step one.

If you're raising capital or bringing on a partner, you need a defensible valuation. Handshake deals based on "feels about right" create problems later. Pay for a professional opinion and document the methodology.

If you've made significant business improvements, get revalued. Added $300K in ARR? Cut churn in half? Hired a COO and removed yourself from operations? Your valuation probably increased significantly-know the new number.

I also recommend getting valued if you're going through a divorce or estate planning situation. Business value is a legal question in those contexts, not just a financial one. Courts and attorneys will require defendable valuations from qualified professionals.

Tax planning is another reason to get formal valuations. If you're gifting equity to family members or setting up trusts, the IRS requires proper valuation documentation. Getting this wrong can create significant tax liabilities down the road.

Tools and Resources for DIY Valuation

You can get a rough valuation yourself before paying for professional help. Start by pulling 12-24 months of financial data from your accounting software. If you don't have accounting software, that's problem number one.

Calculate your trailing 12-month revenue, your SDE or EBITDA depending on business size, and your annual growth rate. Those three numbers plus your industry multiple will get you within 20-30% of a professional valuation.

For online businesses under $5M in value, marketplaces like Flippa show real comps. Filter by your industry and business model, look at what's actually sold (not just listed), and note the multiples.

If you run an agency and you're prepping for exit, I've put together frameworks and spreadsheets inside the 7-Figure Agency Blueprint that walk through the exact financial cleanup process I used before my exits.

For businesses that depend on outbound sales and lead generation, your customer acquisition cost and lead database are part of the valuation equation. Buyers want to know you can consistently generate pipeline. If you're building or selling a company that relies on B2B prospecting, having documented lead sources matters-tools that find verified contact data can show buyers you've systematized your pipeline generation instead of depending on manual research or networking.

Create a simple valuation model in a spreadsheet. List your monthly revenue, monthly expenses, owner salary, and add-backs for the past 24 months. Calculate your monthly SDE. Multiply by 12 to get annual SDE. Apply industry multiples at the low end, middle, and high end of the range. That gives you a valuation range to work with.

The Strategic Value Question

Sometimes a buyer will pay significantly above market multiples because your business has strategic value to them specifically. This is the difference between a financial buyer and a strategic buyer.

A financial buyer evaluates your business based on cash flow and return on investment. They'll pay market multiples and expect the business to pay for itself over 3-5 years. These are individuals, small investors, or financial buyers looking for income-producing assets.

A strategic buyer evaluates your business based on how it fits into their existing operations. Maybe you have technology they want, customers they're targeting, or talent they need. Maybe acquiring you eliminates a competitor or opens a new market. Strategic value can push your multiple 50-100% higher than financial buyers would pay.

My fourth exit was to a strategic buyer. They paid 6.5x EBITDA when financial buyers were offering 4-4.5x. The difference was that our customer list had significant overlap with their target market, and they could upsell their existing products to our customers immediately. They weren't buying cash flow-they were buying distribution and eliminating a competitor at the same time.

If you're building a business with exit potential, think about who the strategic buyers might be. What companies would benefit from owning your customer relationships, technology, or market position? That awareness shapes your growth strategy and can dramatically increase your exit valuation.

Valuation vs. Terms: The Deal Structure Matters

A $2M valuation with $2M cash at close is completely different from a $2M valuation with $1M cash, $500K earnout, and $500K seller financing. The headline number doesn't tell the whole story.

Earnouts are payments contingent on the business hitting performance targets after the sale. They shift risk from the buyer to the seller. If you miss the targets, you don't get paid. I generally avoid earnouts unless they're small (less than 20% of total consideration) and the targets are things I'm confident the buyer can't sabotage.

Seller financing is where you loan the buyer part of the purchase price and they pay you back over time. This is common in smaller deals where the buyer doesn't have full financing. It reduces your risk compared to earnouts, but you're still carrying paper instead of getting cash.

I've turned down higher valuation offers because the terms were garbage. Give me $1.5M cash today over $2.2M spread across three years with earnouts tied to revenue targets the buyer controls. The time value of money and deal risk matter more than the headline price.

When evaluating offers, calculate the present value of the payment stream accounting for risk and timing. Discount earnout payments by 30-50% depending on how confident you are you'll actually receive them. That gives you the real economic value of the offer.

The Role of Business Brokers and M&A Advisors

Business brokers and M&A advisors charge 10-15% of the sale price for smaller deals (under $5M) and 5-10% for larger deals. That sounds expensive, but good ones earn their fee.

They bring buyers you'd never find on your own. They run a professional sales process that creates competition and drives up price. They handle negotiation, due diligence, and paperwork that would take you hundreds of hours.

More importantly, they provide valuation credibility. When a broker tells a buyer your business is worth $3M and here's why, it carries more weight than you making the same claim. They're a neutral third party with market expertise.

I've sold two businesses without a broker and three with one. The ones I sold with a broker closed faster, at higher valuations, and with significantly less stress. The 10% commission paid for itself multiple times over.

If you're selling a business under $500K, you might list it yourself on Flippa or similar marketplaces. Above that threshold, hire a professional. The economics make sense and your odds of a successful close increase dramatically.

Tax Implications of Business Valuation

How your business is valued affects how much you keep after taxes. This is where you need a CPA who specializes in business sales, not your regular accountant who does your annual returns.

Asset sales vs. stock sales have different tax treatments. Earn-outs can defer tax liability but also defer your cash. Structuring the sale as part salary, part capital gains, part consulting agreement can optimize your tax bill if done properly.

I'm not a tax advisor and I'm not giving tax advice. But I've learned the hard way that tax planning should happen before you accept an offer, not after. The structure of the deal determines your tax bill, and once you've agreed to terms, you've locked in the tax implications.

On my third exit, we structured part of the payment as a consulting agreement for 12 months post-sale. That shifted some income from capital gains to ordinary income, which wasn't ideal from a rate perspective, but it allowed me to defer recognition and manage my tax bracket across two years. These are the kinds of details that can save or cost you six figures.

The Real Valuation Happens in Negotiation

Here's the truth: your business is worth exactly what someone will pay for it. All the formulas and multiples are just starting points for negotiation.

I've had buyers offer 40% below my asking price and buyers offer 20% above it. The difference wasn't the business-it was how badly they wanted it and how many other options they had.

When you understand valuation methodology, you can negotiate from knowledge instead of hope. You can defend your asking price with data. You can identify when a buyer is lowballing you versus when the market is telling you something about your business you didn't want to hear.

I've walked away from deals because the buyer's valuation methodology was garbage. I've also accepted offers below my initial ask because the buyer showed me risks I hadn't properly accounted for. The goal isn't to win the negotiation-it's to get a fair price and actually close the deal.

The best exit I've had was my fourth one, not because it was the highest multiple but because the buyer understood the business, valued it fairly, and closed quickly with minimal drama. We were aligned on valuation methodology from day one, which made negotiation straightforward.

Building Value From Day One

If you're serious about building a business you can eventually sell, start tracking your valuation now. Run the numbers quarterly. Make decisions that push the multiple higher. And when the time comes, you'll know exactly what you're worth and why.

Every business decision either increases or decreases your eventual exit valuation. Choosing between project work and retainers? Retainers win. Choosing between high-maintenance clients and diversified revenue? Diversification wins. Choosing between doing it yourself and documenting systems? Systems win.

I track four metrics monthly for every business I own: revenue, profit margin, customer churn, and owner hours invested. Those four numbers tell me if my valuation is going up or down. If I'm working more hours but profit margin is dropping, valuation is falling even if revenue is growing.

The businesses that sell for premium multiples are the ones where the founder optimized for exit value years before they wanted to sell. They built recurring revenue, documented everything, diversified their customer base, and removed themselves from operations. Those decisions compound over time.

You don't need to be ready to sell today. But you should be building a business that someone would want to buy tomorrow. That mindset changes how you operate and dramatically increases your options when you eventually decide to exit.