How Much Is My Business Worth? Four Ways Buyers Actually Calculate It

Buyers do not price your business off revenue. They rebuild your earnings into one adjusted number, apply a multiple drawn from businesses that actually closed, then check whether a lender will finance the result. Knowing which of the four methods fits your business is the difference between an asking price you can defend and a listing that sits for a year.

Run the same set of financials past a broker, a private equity buyer, and an SBA lender, and you can get three different opinions before lunch. Each one is applying a real method correctly. The one that governs your deal depends on your earnings, your margins, and how much the business depends on you personally.

Four calculations set your price: SDE multiple, EBITDA multiple, asset value, and sold comparables. For roughly $2 million in earnings, buyers almost always use SDE, and the multiple usually falls between 2 and 4 times.

KEY TAKEAWAYS

• Your tax return is not your valuation. Buyers recast the P&L first, and the adjusted number is often six figures higher.
• Size picks the method. For earnings under about $2 million, buyers use SDE. Above it, they switch to EBITDA and a different buyer pool.
• The average closed deal ran 2.7 times cash flow in the second quarter of 2026, on a median sale price near $349,000.
• Asset value is a floor, not a price, for any business earning real money.
• The lender has the last word. If the debt service does not cover, the price comes down no matter what the math says.

The question comes up in the first ten minutes of almost every meeting I take. An owner slides three years of tax returns across the table and asks what the business is worth, expecting one number back.

There isn’t one number. There are four ways a buyer can arrive at a price, and on the same company they can produce wildly different answers. Knowing which method a serious buyer will use on your business is the whole game, and it is the first thing we work out during a business valuation in Richmond, VA.

Here is how each one works, in the order a buyer actually applies them.

What Do Buyers Normalize Before They Run Any Numbers?

Before applying any method, a buyer recasts your financials: adding back the owner’s salary, personal expenses, one-time costs, and non-cash items like depreciation. That produces adjusted earnings, the number every valuation method is built on. Your tax return understates this figure, often by six figures, because it was written to minimize taxes.

That gap is not a trick. Your return shows what you kept after doing everything legal to reduce taxable income. A buyer wants to know what the business generated before you made those choices. Typical add-backs:

• One owner’s compensation and benefits — the buyer will pay themselves, not you
• Depreciation and amortization, which cost no cash
• Interest on debt the buyer will not assume
• Personal vehicles, travel, and memberships run through the business
• One-time costs — a lawsuit, a flooded warehouse, a failed software rollout

One caution I give every seller: every add-back needs a paper trail. A buyer’s CPA strips out anything you cannot document, and each rejection costs you its full value times the multiple. A $20,000 add-back you cannot prove is not a $20,000 problem. At 2.7 times, it is a $54,000 problem.

Method One: How Does the SDE Multiple Work?

Seller’s discretionary earnings multiplied by a market multiple. SDE is your net profit plus one owner’s salary and benefits, plus non-cash and non-recurring items. It applies to owner-operated businesses, generally under about $2 million in earnings. In the second quarter of 2026, the average closed deal ran 2.7 times cash flow.

This is the method behind the overwhelming majority of Main Street transactions. The national benchmark is steady: BizBuySell’s Q2 2026 Insight Report put the median sale price at $349,250 on median cash flow of $155,921, with the average cash flow multiple at 2.7, up slightly year over year even as transaction volume fell about 10 percent. Fewer deals are closing, but the ones that close are still getting full price. You can read the underlying data in the BizBuySell Insight Report.

The arithmetic is simple. A business with $400,000 in SDE at 2.7x is worth roughly $1.08 million. At 3.2x it’s $1.28 million. Same earnings, $200,000 apart. That half-turn is bought with clean books and a business that runs without you in it. Most owner-operated companies land between 2x and 4x; below 2x usually signals owner dependency or unreliable records.

When Do Buyers Switch to an EBITDA Multiple?

Once earnings pass roughly $2 million, buyers stop assuming an owner-operator and start pricing in a hired manager. EBITDA subtracts a market-rate salary for that manager, so the earnings figure drops, but the multiple rises. Lower middle market deals have been trading around 5x to 6.5x EBITDA.

The switch is not cosmetic. It changes who is buying. SDE buyers are individuals purchasing a job and a business. EBITDA buyers are private equity groups, family offices, and strategic acquirers purchasing cash flow they will manage from a distance. They pay more per dollar of earnings because they are buying a smaller, harder, more transferable dollar.

Say a company shows $2.4 million in SDE and a competent general manager costs $220,000 fully loaded. EBITDA becomes roughly $2.18 million; at 5.5x, about $12 million, well above what any SDE multiple would produce on the larger number. Businesses in the $2 million to $5 million range often get run both ways. If your broker shows you only one, ask for the other.

What Is an Asset-Based Valuation, and When Does It Apply?

An asset-based valuation totals your tangible assets at fair market value: equipment, vehicles, inventory, real estate, minus liabilities. Buyers use it when earnings are weak, negative, or heavily tied to equipment. For most profitable businesses it sets a price floor rather than a price.

Note that fair market value is not book value. A CNC machine depreciated to $1 on your balance sheet may bring $60,000 at auction, and a five-year-old service fleet is usually worth more than the schedule says. The IRS’s Revenue Ruling 59-60 remains the reference point for how the asset, income, and market approaches relate to one another, and it is still what appraisers cite six decades on.

This method matters most as a check. If asset value lands above your earnings-based value, the business is worth more taken apart than kept running, uncomfortable, but useful to know before a buyer says it. For a profitable business, the amount by which earnings value exceeds asset value is goodwill: reputation, customer relationships, trained staff. That is usually the largest single component of the price, and the part that evaporates fastest when an owner leaves without a transition plan.

How Do Sold Comparables Set the Real Price?

The market approach compares your business against similar companies that actually closed: same industry, similar size, similar geography. It is the only method that tests the other three against reality. A multiple derived from theory means nothing if no comparable business in your sector has sold at it recently.

The critical word is closed. Asking prices are opinions. Anyone can list a business at 5x and leave it on the market for two years. What a broker pulls from transaction databases are completed sales with verified financials: what a real buyer paid, after due diligence, with a lender’s approval behind it.

Geography moves this more than sellers expect. A commercial cleaning company in Henrico County and the same company in Fairfax do not price alike, because the buyer pools, wage bases, and contract values differ. Statewide averages flatten exactly the detail that sets your price. Age matters too; comparables older than about two years describe a different lending environment.

Why Does the Lender Get the Final Vote on Your Valuation?

A price only holds if a lender will finance it. Most Main Street deals in Virginia run through SBA 7(a) financing, capped at $5 million, and the lender tests whether your adjusted earnings cover the debt payment with room to spare. If the coverage fails, the price comes down regardless of the math.

Lenders typically want a debt service coverage ratio of at least 1.25, meaning adjusted earnings cover the annual loan payment 1.25 times over, before the buyer takes a dollar of salary. That single ratio quietly caps thousands of asking prices every year. Program terms are published by the SBA’s 7(a) program.

The rules also tightened. Since SOP 50 10 8 took effect in June 2025, a change-of-ownership loan requires a 10 percent equity injection in the buyer’s own cash; a seller note on full standby covers at most half. Fewer buyers can stretch, which puts more weight on financials a lender can underwrite quickly.

What that means in practice: books that are merely honest are not enough. They have to be legible to a credit officer who has never met you. Financing also drives the calendar, which is worth understanding before you set a date. We mapped the full sequence in our guide to selling a business in Virginia.

What Moves Your Multiple Up or Down?

Two businesses with identical earnings routinely sell a full turn apart. The difference is risk transfer: how much of what makes the business work leaves the building when you do. Most of the factors below can be improved in twelve to eighteen months of deliberate work.

What Do All Four Methods Look Like on One Business?

Run the same company through all four methods and the spread is wide. A Henrico County service business with $400,000 in adjusted earnings can pencil out anywhere from roughly $520,000 on assets alone to $1.4 million on a strong multiple. The gap comes down to risk, not math.

The illustration below uses round numbers for a hypothetical owner-operated service company: $2.1 million in revenue, $400,000 in SDE, $520,000 in equipment and vehicles at fair market value, no debt.

Four defensible methods, an $880,000 spread. The number you can actually defend is the one supported by closed comparables and a lender’s underwriting, here, near $1.05 million, with the path to the top of that range running straight through reducing owner dependency.

Illustrative example using representative figures, not a specific client transaction.

About the Author

William (Bill) Griswold is a business broker with First Choice Business Brokers Richmond, serving Richmond, Henrico, Glen Allen, Chesterfield, and the surrounding counties from the firm’s office on East Parham Road in the 23228 zip code.

Bill came to brokerage from the seller’s side of the table. He bought his first business in college and built it into one of the largest stainless-steel manufacturing companies on the East Coast before selling it. The recasting conversation described above is one he’s sat through himself, as the owner being questioned. He later held commercial sales roles with Motorola, SecurityLink, and ADT, and he and his wife Patricia have since started and run businesses in graphic design, insurance brokerage, and tax preparation.

First Choice Business Brokers has specialized in business sales since 1994 and is a member in good standing of the International Business Brokers Association. The Richmond office is led by Patricia and William Griswold, and works with owners across Virginia as business brokers in Virginia handling confidential sales, valuations, and buyer representation.

What To Do Next

Four methods, four answers, one business, and a lender holding the final veto over all of them. The owners who get top dollar are not the ones with the best story. They are the ones whose numbers survive a stranger’s scrutiny.

The worst time to learn what your business is worth is the month you decide to sell. Most of the factors that move your multiple take a year or more to fix, and all of them are fixable while you are still running the business.

If you want a real number rather than a bracket, we will run all four methods on your financials and walk you through what each one says. Request a confidential business valuation, or call the Richmond office at (804) 520-7557.