When it's time to sell your business, choosing the right valuation method can make or break the deal. Whether you’re preparing for retirement, attracting investors, or simply curious about your company’s worth, understanding the main valuation models is essential.

Here are five of the most reliable methods for valuing a business — and when to use each one.

1. Seller’s Discretionary Earnings (SDE)

Best for: Small, owner-operated businesses

SDE is one of the most common methods for small business valuation. It calculates a company’s real earning power by adding back non-essential expenses like the owner’s salary, benefits, and one-time costs to the net profit.

Formula:
SDE × Industry Multiple = Business Value

Example:
If your adjusted SDE is $120,000 and the industry multiple is 2.5, your business could be worth around $300,000.

📌 Want a deeper dive? Read our guide on how to price a business for sale.

2. Asset-Based Valuation

Best for: Asset-heavy businesses like manufacturers, wholesalers, or real estate firms

This method looks at the total value of your assets minus any liabilities. It’s straightforward and ideal for businesses with significant physical or tangible assets.

Formula:
Total Assets – Total Liabilities = Business Value

Note: This method often undervalues service-based or digital businesses with strong brand equity or IP.

3. Market-Based Valuation

Best for: Comparing similar businesses that have recently sold

This approach is based on recent sale prices of comparable businesses in your industry. It typically uses revenue or earnings multiples to establish value.

Example:
If similar businesses sold for 2.8× annual earnings, and your business earns $100,000 annually:
$100,000 × 2.8 = $280,000 estimated value

It’s useful but depends on access to accurate market data.

4. Discounted Cash Flow (DCF)

Best for: Businesses with steady, predictable future cash flow

DCF projects future income and discounts it to present value using a chosen discount rate. It reflects the time value of money and expected returns.

This method is often used for high-growth companies or startups with clear financial forecasts.

5. EBITDA Multiples

Best for: Larger companies or those seeking institutional buyers

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a cleaner measure of profitability and helps normalize differences across companies.

Valuation typically ranges from 4× to 6× EBITDA, depending on industry norms, growth potential, and risk factors.

Final Thoughts

There’s no single right way to value a business. The best approach depends on your business model, financials, and exit goals. Using multiple methods — or consulting a valuation expert — can provide a more accurate, balanced view.

📘 For a full breakdown of how to calculate value, set your asking price, and negotiate like a pro, check out our complete guide on pricing a business for sale.