OWNER RESOURCES · BUSINESS VALUATION
How buyers value private companies, what moves the number, and how the price differs from what you take home.
By Moses Shmueli · Managing Partner, Northeastern Advisors
Most privately held companies are worth a multiple of their adjusted annual earnings. For small, owner-run businesses that multiple is usually applied to seller’s discretionary earnings (SDE). For companies with roughly $1 million or more in profit, buyers apply it to EBITDA. The multiple itself depends on size, industry, growth and how much risk a buyer takes on.
This guide walks through how to estimate what your business or company is worth, what moves the number, and how the value of the business differs from the cash you actually receive in a sale.
KEY TAKEAWAYS
IN THIS GUIDE
01 · How much is my business worth? The basic formula
02 · Work out your real earnings
03 · Find the right multiple
04 · Adjust for risk
05 · Why buyers can only pay so much
06 · A worked example
07 · Value vs. what you take home
08 · Why calculators and real offers differ
09 · How to increase what your company is worth
Frequently asked questions
01
Buyers of private companies rarely value them on revenue or on assets. They value the cash the business produces and how confident they are that it will keep producing it. In practice that means:
Business value = adjusted earnings × valuation multiple
Each half of that formula deserves its own look, because owners tend to overstate the first and guess at the second. If you want a quick range before reading on, our free business valuation calculator applies this formula to a few inputs.
02
SDE or EBITDA. Seller’s discretionary earnings adds the owner’s salary and benefits back to profit, because a new owner-operator will take that money home. EBITDA assumes the buyer pays a manager a market salary, so the owner’s compensation is not added back. As a rule of thumb, businesses under roughly $1 million of profit sell on SDE, and larger companies sell on EBITDA. Our guide to EBITDA vs. SDE explains which one applies to you.
Add-backs. Your tax return is not the right starting point. Personal expenses run through the business, one-time legal costs and above-market family salaries are normally added back. But every add-back has to survive a buyer’s review, and the ones that cannot be documented are the first thing cut in due diligence. See The Art of Recasting: Defending Add-Backs Credibly.
Quality of earnings. For larger deals, buyers and lenders commission a quality of earnings (QoE) report that tests your numbers line by line, and SBA-financed acquisitions above a certain size now require one. Knowing what it will find before a buyer does protects your price. See Understanding Quality of Earnings Reports.
03
The multiple reflects how much a buyer will pay for each dollar of earnings. In our experience advising on lower middle market transactions, size is the single biggest driver of where a company lands:
| Annual earnings | Valued on | Typical multiple |
|---|---|---|
| Under $500,000 | SDE | 2x to 3.5x |
| $500,000 to $1 million | EBITDA | 3.5x to 5x |
| $1 million to $5 million | EBITDA | 5x to 6x |
| $5 million to $10 million | EBITDA | 6x to 7x |
| $10 million and above | EBITDA | 7x to 8x+ |
Healthcare and recurring-revenue businesses often sell one to two turns above these ranges, and the premium widens as companies grow. Project-based and cyclical businesses usually sit at the low end. For sector-specific ranges, see:
04
Two companies with identical earnings can sell for very different prices. Buyers move the multiple up or down based on how risky the earnings look. The factors that matter most:
For how buyers turn these factors into a price, see How Buyers Underwrite Risk to Set the Right Acquisition Price and What Makes a Company Buyable vs. Unbuyable.
05
Most acquisitions are financed with debt, and lenders set the ceiling. Senior lenders typically lend about 2.5x to 3x EBITDA, and subordinated lenders add less than one more turn. On a deal priced at 6x, that leaves the buyer funding roughly 2x to 3x with equity.
When a seller asks for more than the debt and the buyer’s equity can cover, the gap usually comes back as a seller note or an earnout. That is why a higher headline price often means more of it is paid later and at risk. For how buyers assemble that financing, see How Much Money Do You Need to Buy a Business?.
06
A regional services company reports $900,000 of EBITDA. After recasting, $150,000 of documented add-backs (a one-time legal settlement and the owner’s personal vehicle) bring adjusted EBITDA to $1,050,000. Revenue is diversified, a general manager runs daily operations and 60% of revenue is under annual contracts, so the company earns a multiple near the top of its size range.
| Illustrative item | Amount |
|---|---|
| Reported EBITDA | $900,000 |
| Documented add-backs | $150,000 |
| Adjusted EBITDA | $1,050,000 |
| Multiple | 5.5x |
| Enterprise value | about $5.8 million |
If the same company had one customer at 35% of revenue and an owner who handled every major account, the same earnings might draw a 4x to 4.5x multiple, roughly $4.2 million to $4.7 million. That gap of more than $1 million is the cost of risk, and most of it can be reduced before a sale.
All figures are illustrative. They explain the calculation and are not a valuation of any business.
07
The multiple gives you enterprise value, the headline price for the business free of debt. What reaches your bank account is usually lower:
08
An online calculator, including ours, gives you a reasonable starting range from a few inputs. A buyer’s offer is based on diligence: verified earnings, a close look at customers and contracts, and the buyer’s own financing. That is why the two can differ, sometimes by a lot. See How Buyers Stress-Test Your Business Valuation Before Making an Offer.
The other reason is competition. A business shown to one buyer gets one buyer’s price. A business taken to many qualified buyers in a controlled process gets the market price. See which businesses get the highest offers.
09
The most valuable work usually happens 12 to 24 months before a sale: document add-backs, reduce customer concentration, move relationships from you to your team, convert one-off customers to contracts, and clean up monthly reporting. Our guides cover each step:
GET A NUMBER FOR YOUR COMPANY
Use the free calculator for a quick range. When you want a number you can plan around, Northeastern Advisors provides confidential, market-based valuations grounded in more than three decades of lower middle market deal experience, with a focus on healthcare and home care.
COMMON QUESTIONS
A business with $1 million of adjusted EBITDA typically sells for about 5x to 6x, or roughly $5 million to $6 million, before debt, working capital adjustments, fees and taxes. Where it lands depends on industry, growth, customer concentration and how much the business depends on the owner.
Almost always on profit. Revenue multiples are used mainly for fast-growing software companies, or as a rough cross-check in industries where margins are very consistent. For most owner-run and lower middle market businesses, buyers price seller's discretionary earnings (SDE) or EBITDA.
Small, owner-operated businesses commonly sell for about 2x to 3.5x seller's discretionary earnings. Rules of thumb are a starting point only. Two businesses with the same earnings can differ by a full turn of earnings or more because of risk.
They give a useful starting range, but they cannot test your add-backs, customer contracts or trends the way a buyer will. Use a calculator to see whether a sale makes sense, then get a professional valuation before making decisions.
A market-based valuation from an M&A advisor usually takes one to three weeks once financial statements, tax returns and a customer breakdown are provided.
It changes what you take home and when. The same headline price can be all cash at closing, or partly a seller note or earnout paid over several years, which carries more risk for you. Comparing offers means comparing structure, not just price.