How to Value a Small Business in 2026

You found a business you want to buy. The seller is asking $850,000. Is that a good deal? A ripoff? A steal? Without a proper valuation framework, you are guessing — and guessing with six or seven figures on the line is how acquisitions go sideways.

This guide breaks down the three valuation methods that professionals use to price small businesses, then gives you a practical 3-step framework you can apply to any deal you are evaluating today.

Why Valuation Matters More Than You Think

Most first-time buyers focus on revenue. "It makes $500K a year, so it must be worth something." But revenue is vanity. A business doing $500K with $400K in expenses is worth dramatically less than one doing $500K with $150K in expenses. Valuation methods exist to cut through the noise and answer one question: what are you actually buying?

You are buying future cash flow. Every valuation method is a different lens for estimating how much cash this business will put in your pocket after you own it — and how risky that estimate is.

The Three Valuation Methods

1. SDE Multiple (Seller's Discretionary Earnings)

Best for: Owner-operated businesses under $5M in revenue.

SDE is net profit plus the owner's salary, benefits, and any personal expenses run through the business. It represents the total financial benefit to one working owner. For most small businesses — restaurants, service companies, e-commerce shops, local trades — SDE is the standard.

How it works: Take the business's SDE and multiply it by an industry-specific multiple. A landscaping company with $200K SDE at a 2.5x multiple is worth roughly $500,000.

Typical SDE multiples by industry:

These ranges come from marketplace transaction data (BizBuySell, IBBA) and vary based on business size, growth rate, and risk profile. A business at the high end of its range typically has strong recurring revenue, low owner dependency, and multiple years of clean financials.

2. EBITDA Multiple (Earnings Before Interest, Taxes, Depreciation, Amortization)

Best for: Larger businesses ($1M+ revenue) with professional management and multiple employees.

EBITDA strips out financing decisions, tax strategies, and accounting choices to show operating profitability. It is the standard for businesses where the owner is not the primary operator — where you are buying a system, not a job.

How it works: Same concept as SDE multiples, but applied to EBITDA. A manufacturing business with $400K EBITDA at a 4.0x multiple values at $1.6M.

EBITDA multiples are generally higher than SDE multiples because the businesses that use them are larger, more stable, and less dependent on any single person. If you are looking at a business with a GM running day-to-day operations and the owner is semi-retired, EBITDA is the right lens.

3. Revenue Multiple

Best for: High-growth businesses, pre-profit companies, or SaaS with strong recurring revenue.

Revenue multiples are used when earnings do not tell the full story — either because the business is investing heavily in growth, or because recurring revenue (subscriptions, contracts) makes future cash flow unusually predictable.

How it works: A SaaS company with $300K ARR at a 2.0x revenue multiple values at $600K. Revenue multiples for small businesses typically range from 0.5x to 3.0x, with SaaS and subscription businesses commanding the top end.

A high revenue multiple with low margins is a bet on future profitability. Make sure you understand what needs to change for that bet to pay off.

The 3-Step Valuation Framework

Here is a practical framework you can apply to any small business deal:

Step 1: Calculate SDE (or EBITDA)

Start with the business's tax returns — not their "adjusted" P&L. Take net income and add back:

• Owner's salary and benefits
• One-time or non-recurring expenses
• Personal expenses run through the business (vehicle, phone, meals)
• Interest and depreciation (for EBITDA)

If the seller cannot produce 2-3 years of clean financials, that is a risk factor — and it should lower the multiple you apply.

Step 2: Apply the Industry Multiple

Use the SDE or EBITDA multiple range for the business's industry. Start at the midpoint of the range. Then adjust:

• Adjust UP for: growing revenue, recurring customers, low owner involvement, diversified client base, 5+ years of history
• Adjust DOWN for: declining revenue, high customer concentration, owner-dependent operations, thin margins, short track record

The result is your valuation range — a low estimate (using the low multiple) and a high estimate (using the high multiple). The fair market value is somewhere in between, weighted by the risk factors.

Step 3: Assess the Risk

The multiple gives you a price. Risk assessment tells you whether that price is safe. Four factors matter most:

Customer concentration: If the top 3 clients account for more than 40% of revenue, one lost contract could sink the business. This is the number one risk factor in small acquisitions.

Owner dependency: How much of the business's value walks out the door when the owner leaves? If the owner is the primary salesperson, the main client relationship manager, AND the operator — you are buying a job, not a business.

Revenue stability: Is revenue growing, flat, or declining? How long is the track record? A business with 5 years of flat $300K revenue is far less risky than one with 18 months of hockey-stick growth from $50K to $300K.

Industry risk: Some industries face structural headwinds (print media, traditional retail). Others have tailwinds (home services, healthcare). This does not change the math, but it changes the confidence level of the projection.

Putting It All Together: A Real Example

Say you are looking at a residential cleaning company:

• Revenue: $450,000/year
• SDE: $165,000 (after adding back owner salary)
• Industry: Home Services (SDE multiple: 2.0x – 3.0x)
• Owner works full-time as the operations manager
• Top 3 clients = 15% of revenue (good diversification)
• 4 years of stable revenue

Midpoint multiple: 2.5x. Valuation: $412,500. Because the client base is diversified and revenue is stable, you could justify moving toward 2.7x ($445K). But the owner runs everything — that dependency pushes it back toward 2.3x ($380K).

A fair offer range: $380,000 – $445,000. If the asking price is $500,000, you know it is roughly 15-30% above fair market value, and you have the data to negotiate from.

Valuation Is Step One. Due Diligence Is Step Two.

Once you have a valuation range, you need to verify that the business actually delivers what the seller is claiming. That means confirming the financials, reviewing contracts, assessing customer concentration, and checking the operational health of the business. Our business acquisition due diligence checklist covers all six areas — with 30+ items and explanations for each — so you don't miss anything before close.

Stop Guessing. Run the Numbers.