Valuation
Business Valuation Methods: Understanding What Your Business is Worth
Alex Bulbulian
Understanding business valuation is essential whether you are buying, selling, or planning for the future. Here are the three primary valuation methods used for Main Street and Lower Middle Market businesses.
1. Income-Based Approach (Most Common)
This method values a business based on its ability to generate income. The two most common metrics are:
- SDE (Seller's Discretionary Earnings): Total owner benefit including salary, perks, and add-backs. Most common for businesses under $1M.
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. Used for larger businesses with professional management.
Multiplied by an industry-specific multiple (typically 2-5x SDE for Main Street businesses).
2. Market-Based Approach
Compares your business to similar businesses that have recently sold. This provides a reality check against actual transaction data.
3. Asset-Based Approach
Totals the fair market value of all business assets minus liabilities. Most relevant for asset-heavy businesses like manufacturing or distribution.
Factors That Increase Value:
- Consistent revenue growth
- Diversified customer base
- Strong management team
- Recurring revenue
- Long-term lease
- Clean financial records
Factors That Decrease Value:
- Owner dependence
- Customer concentration
- Declining revenue
- Short lease term
- Deferred maintenance
1. Income-Based Approach (Most Common)
This method values a business based on its ability to generate income. The two most common metrics are:
- SDE (Seller's Discretionary Earnings): Total owner benefit including salary, perks, and add-backs. Most common for businesses under $1M.
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. Used for larger businesses with professional management.
Multiplied by an industry-specific multiple (typically 2-5x SDE for Main Street businesses).
2. Market-Based Approach
Compares your business to similar businesses that have recently sold. This provides a reality check against actual transaction data.
3. Asset-Based Approach
Totals the fair market value of all business assets minus liabilities. Most relevant for asset-heavy businesses like manufacturing or distribution.
Factors That Increase Value:
- Consistent revenue growth
- Diversified customer base
- Strong management team
- Recurring revenue
- Long-term lease
- Clean financial records
Factors That Decrease Value:
- Owner dependence
- Customer concentration
- Declining revenue
- Short lease term
- Deferred maintenance