How to Value a Business to Buy: 5 Models That Work

Why Most Business Valuations Are Wrong

I've bought and sold multiple SaaS companies, and the biggest mistake I see first-time buyers make is treating valuation like a science problem. They Google "business valuation calculator," plug in some numbers, and think they've figured it out.

Here's the reality: valuation is negotiation dressed up in spreadsheets. The seller wants the highest multiple. You want the lowest price. The "real" value is whatever you can agree on that makes the deal work for both sides.

That said, you still need to understand how businesses are actually valued in the market. Otherwise you'll either overpay by 50% or lowball so hard the seller won't take you seriously.

The gap between what sellers think their business is worth and what buyers will actually pay is where most deals die. I've seen business owners who built a company over 20 years anchor to what they need for retirement, not what the market will pay. I've also seen buyers who try to steal businesses for nothing and wonder why nobody takes their offers seriously.

The 5 Valuation Methods That Actually Matter

There are dozens of academic valuation methods. Most are useless for small business acquisitions. Here are the five I actually use when evaluating a business to buy:

1. SDE Multiple (The Standard for Small Businesses)

SDE stands for Seller's Discretionary Earnings. It's basically net profit plus the owner's salary, benefits, and any personal expenses run through the business.

Most small businesses (under $5M revenue) sell for 2-4x SDE. Service businesses trend toward 2-3x. Software and subscription businesses can hit 3-5x or higher if they have recurring revenue and low churn.

Here's how to calculate it: Take the business's net profit, add back the owner's salary, add back owner benefits (health insurance, car payments, whatever), add back one-time expenses that won't repeat, and add back interest, taxes, depreciation, and amortization.

If a business shows $100K net profit, the owner pays themselves $80K, and there's $20K in one-time moving expenses, the SDE is $200K. At a 3x multiple, you're looking at a $600K purchase price.

The reason SDE works better than pure profit for small businesses is that owners structure compensation differently. One owner might pay themselves $200K salary and show zero profit. Another might take $50K salary and show $150K profit. SDE normalizes this so you're comparing apples to apples.

2. EBITDA Multiple (For Larger Businesses)

Once you're looking at businesses over $5M in revenue, sellers and brokers switch to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This is similar to SDE but doesn't add back the owner's salary, because at this scale the business should have professional management in place.

EBITDA multiples range from 3-7x for most established businesses. Tech companies, SaaS platforms, and businesses with strong recurring revenue can command 8-12x or more.

The multiple depends on growth rate, customer concentration, industry trends, and how difficult the business is to operate. A business growing 50% year-over-year with 200 customers will get a higher multiple than a flat business with three customers making up 80% of revenue.

3. Revenue Multiple (For High-Growth or Pre-Profit)

If the business isn't profitable yet or has explosive growth, buyers often use a revenue multiple instead. This is common in SaaS acquisitions.

Most SaaS companies trade at 2-6x annual recurring revenue (ARR). A business doing $500K ARR might sell for $1-3M depending on growth, churn, margins, and market position.

Revenue multiples make sense when the business is spending heavily on growth and could be profitable tomorrow if it stopped investing. If the company is losing money with no path to profitability, revenue multiples get dangerous fast.

4. Asset-Based Valuation (For Physical Businesses)

If you're buying a business with significant physical assets-equipment, inventory, real estate-you need to know what those assets are worth separately from the business operations.

Add up the fair market value of all tangible assets, subtract liabilities, and you have the asset-based value. This sets a floor on what the business is worth. Even if the business is struggling, you could theoretically liquidate the assets and recover this amount.

I rarely use this as my primary valuation method, but it's useful as a sanity check. If someone wants $500K for a business and the assets are worth $50K, they'd better have strong cash flow to justify that premium.

Asset-based valuation becomes more important when you're looking at businesses with real estate, manufacturing equipment, or significant inventory. I've seen deals where the real estate alone was worth more than the asking price for the entire business, which made the operating business essentially free if you were willing to hold the property.

5. Discounted Cash Flow (DCF) - When You Want to Get Fancy

DCF takes projected future cash flows, discounts them back to present value, and gives you a "fair value" based on what the business should generate over time.

It's theoretically the most accurate method. In practice, it's also the most manipulable. Change your growth assumptions by 10% and the valuation swings by 40%. Adjust your discount rate and suddenly the business is worth double.

I use DCF as a sanity check, not as my primary method. If the DCF value is wildly different from the market multiple, something's off-either my assumptions are wrong or the market is mispricing the business.

How to Confirm Your Valuation Using Multiple Approaches

Professional valuators don't just use one method. They triangulate using three different approaches to confirm the number makes sense from multiple angles.

Start with the income-based approach-that's your SDE or EBITDA multiple. This tells you what the business is worth based on its earning power.

Then check the market-based approach. What are comparable businesses actually selling for? Look at recent sales in the same industry, similar size, similar business model. Marketplaces like Flippa let you see closed deal prices. Business brokers can share comparables if you're working with them.

Finally, validate with the asset-based approach. What are the hard assets worth? This is your floor. If the income-based valuation is $800K but the assets are only worth $100K, you're paying a $700K premium for goodwill, customer relationships, and future earnings. That premium needs to be justified.

If all three methods land in a similar range, you've got a solid valuation. If one method is way off, dig into why. Either that method doesn't apply to this business, or you're missing something important.

What Actually Drives Value Up or Down

The multiple is where the real negotiation happens. Two businesses with identical profit can sell for 2x or 5x depending on these factors:

Recurring revenue: A business with monthly subscriptions or retainers is worth more than project-based revenue. Predictability = premium.

Customer concentration: If 50% of revenue comes from one customer, the business is risky. Diversified customer base = higher multiple. Any single customer over 25% of revenue is a red flag that should lower the valuation or require the customer to sign a long-term contract as part of the deal.

Owner involvement: If the business falls apart without the owner, it's worth less. Systems, team, processes that work without you = higher value.

Growth trajectory: Flat or declining revenue kills valuations. Even modest growth (10-20% annually) adds 0.5-1.0x to the multiple.

Market position: Are you in a growing industry or a dying one? A lead generation agency serving AI companies will command a better multiple than one serving print magazines.

Churn rate: High customer turnover means you're constantly replacing revenue. SaaS businesses with under 5% monthly churn get premium multiples.

Margin profile: Two businesses doing the same revenue can have wildly different margins. A $1M revenue business with 60% margins is worth more than a $1M revenue business with 20% margins, even if net profit is similar, because the high-margin business has more operational leverage.

Transferability: How easy is it to hand this business to someone else? If it runs on documented processes, has a competent team, and doesn't depend on the owner's personal brand, it's more valuable. If the owner is the only one who knows how anything works, you're buying a job, not an asset.

Due Diligence: Where Valuations Meet Reality

The seller gives you their valuation. Your job is to verify it's real and find the risks that justify a lower price.

Request at least 36 months of financials. Look for trends, not snapshots. A business that did $200K profit last year but $150K the year before and $120K the year before that is declining, not growing.

Access the bank accounts and payment processors. I want to see money actually hitting the account, not just what's on the P&L. Sellers can manipulate accrual accounting. Bank deposits don't lie.

Interview key employees and customers if possible. Find out if the team is actually capable or if the owner does everything. Talk to the top 5-10 customers and gauge their satisfaction and likelihood to stay after the transition.

Review contracts and customer agreements. Are customers on month-to-month or annual contracts? Do they have the right to cancel if ownership changes? Is there any revenue that's at risk in the transition?

Check out the competitive landscape. If the business depends entirely on Google organic traffic, look at their rankings, backlink profile, and whether their traffic is stable or declining. If it's an outbound sales operation, understand where leads come from. B2B contact databases or custom scrapers might be part of the infrastructure you're inheriting.

Request access to all analytics, ad accounts, CRM, and operational tools. You want to see the real numbers behind the marketing claims. If they say 10,000 email subscribers drive 30% of revenue, prove it in the email platform and Google Analytics.

Don't skip legal and tax due diligence. Get a lawyer to review contracts, leases, employment agreements, and any pending litigation. Get an accountant to verify the tax returns match the financials and check for any tax liabilities or compliance issues that could become your problem after closing.

Deal Structure: How You Pay Matters As Much As What You Pay

Nobody tells you this, but deal structure can matter more than valuation. A $1M all-cash deal at closing is very different from $400K down, $300K seller note, and $300K earnout.

All-cash at closing: Simplest structure. Seller gets their money, you own the business, done. You take all the risk. Sellers prefer this, which means you should negotiate a lower multiple if you're offering all cash.

Seller financing: You pay part upfront and the rest over 2-5 years. This reduces your cash outlay and gives the seller skin in the game during the transition. If the business tanks, you still owe the money (unless you negotiate otherwise), but at least you're not out the full amount immediately.

Earnout: Part of the purchase price is contingent on the business hitting certain metrics post-sale. If they claim the business will grow 30% next year, structure an earnout that pays them a premium if that actually happens. This aligns incentives and protects you if the projections are fantasy.

Asset purchase vs stock purchase: Asset purchases let you pick what you're buying (assets, customer list, domain) and leave liabilities with the seller. Stock purchases mean you buy the whole entity, warts and all. Most small business deals are asset purchases for this reason.

I've done deals where I paid 5x SDE with favorable terms (low money down, long seller note, earnout for growth) and others where I paid 3x SDE all cash. The 5x deal was actually less risky because I wasn't putting up all the money upfront.

The other advantage of creative deal structure is it makes you a more attractive buyer even if you're not the highest bidder. A seller who gets $700K guaranteed over three years with you might prefer that over $800K contingent on an earnout they don't believe in from another buyer.

Red Flags That Should Kill the Deal

Some warning signs should make you walk away no matter how good the valuation looks:

Seller won't provide full financials or access: If they're hiding something, assume the worst. Every honest seller I've dealt with opened the books completely.

Revenue is declining: Unless you have a specific plan to fix it, buying a declining business is catching a falling knife. The valuation is based on trailing 12 months, but if the business keeps declining, you overpaid.

Customer concentration over 25% from one customer: One customer leaving wipes out the business. Even 25% is risky. I prefer no single customer over 10% of revenue.

Owner is the entire sales function: If the business depends on the owner's personal relationships and reputation to generate revenue, it's not transferable. You're buying a job, not a business.

Regulatory or legal issues: Pending lawsuits, tax problems, compliance gaps-these can destroy value overnight. Do full legal due diligence.

No documentation or processes: If everything lives in the owner's head and there are no written procedures, you'll spend the first year just trying to figure out how to run the business instead of growing it.

Industry in structural decline: Don't buy a business in a dying industry unless you're getting it for pennies and have a specific turnaround plan. The best operator in the world can't save a business selling fax machines.

Where to Find Businesses to Buy

Marketplaces like Flippa are the easiest starting point. You'll find everything from $10K side projects to $1M+ established businesses. Quality varies wildly, so you need to be diligent.

Business brokers represent sellers and typically handle deals from $500K to $50M+. They'll send you opportunities that match your criteria. Just remember the broker works for the seller, not you. Their job is to get the highest price possible, which means everything in the listing is positioned to make the business look as attractive as possible.

Direct outreach works too. If you want to buy a specific type of business, reach out to owners cold. Most owners haven't thought about selling, but if you present a good offer at the right time, deals happen. I built my agency partially on outbound prospecting, and the same principles apply to sourcing acquisition targets.

If you're targeting local businesses like agencies, consulting firms, or service companies, you can build a prospect list and reach out systematically. ScraperCity's Maps scraper can pull local business data if you're going after specific geographic markets or industries.

If you're serious about acquiring businesses, having a systematic approach to identifying and evaluating opportunities matters. I break down the framework for building repeatable systems inside my coaching program, but the core idea is simple: treat deal sourcing like a sales pipeline.

Understanding Industry-Specific Valuation Multiples

Not all businesses are valued the same. A SaaS company selling for 5x revenue would be a steal. A restaurant selling for 5x revenue would be insane.

SaaS and software businesses typically trade at the highest multiples-anywhere from 3-10x revenue or 15-30x EBITDA for high-growth companies. The recurring revenue model, low overhead, and scalability justify premium valuations.

Agencies and service businesses usually sell for 2-4x SDE or EBITDA. They're people-dependent, harder to scale, and often tied to the owner's relationships. If the agency has retainer clients, documented processes, and a strong team, you might get to 4-5x. If it's all project work and the owner does all the selling, expect 2-3x.

E-commerce businesses typically trade at 2-4x SDE depending on brand strength, supplier relationships, and customer acquisition costs. Amazon FBA businesses often sell at the lower end (2-3x) because they're easier to replicate. Branded DTC businesses with owned audiences can command 4-6x if they have strong repeat purchase rates.

Local service businesses (plumbing, HVAC, landscaping) usually trade at 2-3x SDE. They're geographically limited, require physical labor, and often have thin margins. If the business has long-term contracts, fleet vehicles, and doesn't depend on the owner, you might see 3-4x.

Knowing the typical multiple for your industry helps you identify outliers. If someone's asking 8x EBITDA for a service business, they're either delusional or the business has some unique advantage that justifies the premium.

Negotiation Tactics That Actually Work

Sellers anchor high. That's expected. Your job is to justify a lower price without insulting them.

Point to specific risks and quantify them. Don't just say "customer concentration is a problem." Say "30% of revenue comes from two customers, which creates $180K of at-risk revenue. If we lose one, the business value drops by $360-540K at a 2-3x multiple. I need to see that reflected in the price or deal structure."

Use multiple valuation methods and show them all. If SDE says $600K but DCF says $450K and a revenue multiple says $500K, you have a range to negotiate within. Anchor to the lower end of the range.

Offer favorable terms in exchange for a lower price. Sellers care about different things. Some want all cash immediately. Others want to minimize taxes and prefer a longer payout. Some want to stay involved. Find what they actually want and trade things that cost you little but matter to them.

Ask for a transition period where the seller stays on to train you and ensure continuity. This protects you and gives the seller peace of mind that their business will be in good hands. Offering to keep them involved (consulting agreement, advisory role) can make them more flexible on price because they still have some connection to what they built.

Walk away if the numbers don't work. The best negotiation leverage is being willing to kill the deal. There are thousands of businesses for sale. Don't get emotionally attached to one.

Tax Implications of Different Deal Structures

How you structure the deal impacts both your taxes and the seller's taxes, which affects negotiation.

Asset purchases are usually better for buyers. You get to step up the basis of the assets and depreciate them, which creates tax deductions. The seller typically pays more tax on an asset sale (ordinary income rates on some assets vs capital gains), which is why they often want a higher price for asset deals.

Stock purchases are often better for sellers. They pay long-term capital gains on the entire sale, which is usually the lowest tax rate. But you inherit all the liabilities of the business, which is risky.

If you're buying a C-corp and doing a stock purchase, you might face double taxation down the road when you eventually sell or take dividends. Most small business buyers avoid this by structuring as asset purchases or buying S-corps or LLCs where the tax treatment is simpler.

Talk to a CPA before finalizing deal structure. The tax implications can swing the effective price by 15-30% depending on how you structure it. What looks like a great deal at one price might be terrible after taxes, and vice versa.

What I Wish I Knew Before My First Acquisition

I overpaid on my first deal because I fell in love with the business and ignored weak points in the financials. The seller said revenue was "trending up," and I believed it without verifying. Revenue was flat, and I paid for growth that didn't exist.

I've also walked away from deals that looked perfect on paper because the owner couldn't explain where customers actually came from. If the acquisition strategy is "customers just show up," that's not a strategy. That's luck, and luck doesn't transfer.

The best deals I've done shared one trait: the seller was transparent, helpful, and genuinely wanted the business to succeed under new ownership. If the seller is adversarial or evasive during due diligence, it gets worse after you wire the money, not better.

Another lesson: don't skip the transition period. I bought one business where the seller was gone within two weeks and I had to reverse-engineer how everything worked. It cost me six months of lost momentum and probably $50K in mistakes that could have been avoided if the seller had stuck around for 30-60 days to train me properly.

Valuation is part art, part science, and part negotiation. Use the models to get in the ballpark. Use due diligence to find the real risks. Use deal structure to protect yourself. And use your judgment to decide if the business is actually worth owning.

The framework I use for evaluating businesses-both to buy and to build-comes down to systems. Can this business run without constant firefighting? Are there documented processes? Is there a lead generation system that works? If you're building a business with the intent to sell it someday, these same questions determine what multiple you'll get. I break down the full playbook for systematizing agency operations in my free 7-Figure Agency Blueprint.

If you want help thinking through a specific deal or applying these valuation methods to a business you're considering, I walk through real examples inside Galadon Gold. But whether you work with me or not, the principles are the same: validate the numbers, understand the risks, structure the deal to protect yourself, and only buy businesses that make sense at the price you're paying.