How to value a small business you want to buy

You found a business you like, and the listing says $1.2 million. Is that a fair price, a steal, or a number the broker pulled from hope? Valuing a small business you want to buy comes down to three questions, and none of them require a finance degree — just the discipline to ask them in order.

Let's walk through it the way you'd actually do it at the kitchen table.

Step 1: Find the real earnings (SDE), not the listed profit

The profit line on a listing is a marketing number. What you want is SDE — Seller's Discretionary Earnings: the business's pre-tax profit, plus the owner's salary and perks, plus one-time expenses that won't continue under you. It answers the only question that matters to a buyer who plans to run the business: how much cash does this thing actually put in one working owner's pocket in a year?

Here's the thing: SDE is built from add-backs, and add-backs are where sellers get creative. The owner's $80,000 salary? Legitimate add-back — you'll replace them. The "one-time" legal expense that shows up three years running? Not one-time. The $30,000 of "personal travel" that was actually customer visits? You'll have that cost too. Before you trust any SDE figure, work through the add-backs yourself (see how to tell a legit add-back from an inflated one) — every dollar of inflated add-back costs you three to four dollars of purchase price, because it gets multiplied.

Step 2: Apply a multiple — and know what moves it

Once you trust the SDE, the market shorthand is a multiple. As a screening rule of thumb, owner-operated small businesses tend to change hands around 3x to 4x SDE. A business that genuinely runs without the owner — a real manager, documented systems — can justify more, because the buyer is purchasing income, not a job.

What pushes a business toward the top of the range:

• It runs without the seller. If every customer relationship lives in the owner's head, you're buying a job with a down payment.
• Revenue that repeats. Service contracts and recurring customers beat one-off projects.
• A spread-out customer base. If one client is 40% of revenue, one phone call can erase the value.
• Clean books. Tax returns that match the P&L. If the seller says the "real" numbers are different from the tax returns, believe the tax returns.

What drags it toward the bottom — or below: the mirror image of that list, plus declining revenue, deferred maintenance, and a lease that expires in eight months. Many of those overlap with the red flags that sink deals.

Be careful with any tool or broker that quotes you a precise "market value" for a Main Street business. There's no ticker for a plumbing company in Gilbert, Arizona. A multiple range is a screen — it tells you whether an asking price deserves a closer look or a raised eyebrow. It is not an appraisal.

Step 3: Run the lender math — the number that actually decides

Here's the step most valuation articles skip, and it's the one that ends more deals than any multiple: will a bank finance this price?

Most small-business acquisitions in the US are financed with an SBA 7(a) loan. Your lender will take the business's annual cash flow and divide it by the annual loan payments. That ratio is the debt service coverage ratio (DSCR), and SBA lenders typically underwrite to a floor of about 1.15 — at least $1.15 of cash flow for every $1.00 of loan payment — and like to see room above it. They also measure it after setting aside a real salary for whoever runs the business, and fold in your personal debt.

This is why the lender math is the real valuation test: a price can sit politely inside the 3x–4x band and still fail, because at that price, with your down payment, the loan payments eat the cash flow. When that happens, the price is wrong no matter what the multiple says. You can run this check on any listing in about a minute with the free does-it-pencil check.

A worked example

Say a heating-and-air business is listed at $850,000:

That deal screens well: the multiple is reasonable and the cash flow covers the debt with margin. Now the real work starts — verifying that $295,000 is real, analyzing the business end to end (see how to analyze a business before you buy it), and checking for the red flags that kill deals. A good screen doesn't say "buy it." It says "this one deserves your next twenty hours."

What if the asking price fails the math?

Then you've learned something valuable, cheaply. You have three honest options: negotiate the price down to where the math works, restructure the deal (a seller note on standby can change the coverage picture), or walk. What you don't do is talk yourself into it. The multiple is a story; the coverage ratio is arithmetic. When they disagree, arithmetic wins.

And remember the professionals' role here: a good SBA lender will tell you for free whether a loan can work — talk to one as soon as a deal looks real. A CPA should check the seller's numbers before you bet your savings on them. Scope gets you to both conversations prepared, so you're paying them for judgment, not paperwork sorting.

FAQ

What is a business with $300K of SDE worth?

As a screen: roughly $900K–$1.2M if it's owner-operated (3x–4x SDE), adjusted for how well it runs without the owner, how concentrated the customers are, and how clean the books are. Whether any specific price is right depends on whether the cash flow finances it.

Is the asking price usually negotiable?

Usually, yes. Listings are priced to leave room, and a buyer who can show the lender math — "at this price, the loan doesn't cover" — negotiates from evidence instead of opinion.

SDE or EBITDA — which should I use?

For an owner-operated small business, SDE. EBITDA assumes management stays and gets paid; SDE assumes you're the management. Using the wrong one misprices the deal by exactly one owner's salary.

Do online valuation calculators work?

They're fine as screens if they show their work. Treat any tool that spits out one precise number with no assumptions the way you'd treat a seller who won't show tax returns.

Do I still need a professional valuation?

For most Main Street deals, a formal appraisal happens inside the SBA loan process anyway (lenders order one). Your job before that is the screen: real SDE, sane multiple, financeable price.

Educational content, not financial, legal, or tax advice for your situation — confirm specifics with your own CPA and attorney.