A business valued on its earnings is worth its yearly profit times a multiple. Profit of $150,000 at 5× puts $750,000 on the whole business, before its debts are settled.
The calculator does that sum, then takes off net debt to show what the owners' stake is worth. The judgment sits in the two numbers you type: which profit, and which multiple.
The price of the business versus the price of the shares
The headline figure, "Estimated valuation", is the enterprise value. It prices the operation itself, however it's financed. Equity value is what's left for the owners once the borrowings are repaid and the cash is counted.
Net debt is optional. If the business holds more cash than it owes, enter the difference as a negative number. Equity value then comes out above the headline. Set the field to 0 and you'll see the enterprise value alone. The net debt calculator nets total debt against cash for you.
Which profit belongs in the box?
The field asks for EBITDA: earnings before interest, taxes, depreciation and amortization. Because it ignores interest and tax, it doesn't change with how a buyer funds the purchase.
Then adjust it to what a new owner would really earn:
- Your own pay. Say you draw $30,000, but a manager would cost $80,000. A buyer who hires one earns $50,000 less a year. At 4×, that's $200,000 off the value.
- One-off costs. A $20,000 legal bill that won't recur can be added back. At 4×, it's worth $80,000.
- One-off income. A single huge order or an insurance payout won't repeat. Multiply it by 4 and you'd pay four times for money that arrives once.
If profit swings, an average of recent years is a fairer base than your best one.
Where the multiple comes from
A multiple is a price per dollar of earnings. OpenStax's finance textbook uses a $24 share that earns $4 a year. Its price-to-earnings ratio is 6: investors pay $6 for each $1 of earnings.
The same textbook warns that a P/E ratio on its own tells you very little. It becomes useful once you compare it with the company's history or with other firms in the same industry. For a small business, that means recent sales of similar ones.
A comparable business that sold for $900,000 with $250,000 of EBITDA went for 3.6×. The EBITDA multiple calculator does that division for you.
Don't borrow a stock market P/E ratio instead. It divides the share price by earnings after interest and tax. The multiple here works on EBITDA, before both, so the two aren't interchangeable.
What a multiple says about the buyer's return
OpenStax prices steadily growing dividends with the constant-growth formula. It fits any cash a business pays its owners:
With no growth, that's just cash ÷ required return. So paying 4× for cash that stays flat earns 25% a year. At 5× it's 20%, and at 8× it's 12.5%. The formula only works when the required return is above the growth rate.
Growth lifts the multiple. That fits a common reading OpenStax reports: firms with high P/E ratios should be growth companies. A buyer wanting 20% on cash that grows 3% a year can pay about 5.9 times next year's cash.
One catch: EBITDA isn't cash in the owner's pocket. Tax and replacement equipment come out of it first. If they take $120,000 of $300,000, a buyer paying 4× keeps $180,000 a year. That's 15% on $1,200,000, not 25%.
Debt moves the owners' share faster than the price
Here's one business with $300,000 of EBITDA, at three multiples and three levels of debt:
| Multiple | Net debt | Enterprise value | Equity value |
|---|---|---|---|
| 3 | $500,000 | $900,000 | $400,000 |
| 4 | $500,000 | $1,200,000 | $700,000 |
| 5 | $500,000 | $1,500,000 | $1,000,000 |
| 4 | −$100,000 (net cash) | $1,200,000 | $1,300,000 |
| 4 | $1,400,000 | $1,200,000 | −$200,000 |
Dropping from 4× to 3× cuts the business's value by 25%. The owners' equity falls from $700,000 to $400,000, or 43%. The debt stays put, so every turn of the multiple lands on the equity.
In the last row the business is still worth $1,200,000, yet the equity is negative. A sale at that price would leave $200,000 of debt unpaid.
How the IRS splits the price
According to the IRS, the sale of a business usually isn't the sale of one asset. All its assets are sold, and each counts as sold separately for the tax treatment of its gain or loss.
When a group of assets making up a business changes hands, buyer and seller generally both file Form 8594. The price is split by the residual method. Cash and deposit accounts come first. Then set classes of assets get their share, each up to its fair market value.
Whatever is left lands in Class VII: goodwill and going concern value. Say a buyer pays $1,200,000 and the equipment and stock are worth $400,000. If nothing else changes hands, the other $800,000 is Class VII.
That's two-thirds of the price resting on the profit carrying on after the sale. Test that part hardest before you agree on a price.
When a multiple is the wrong tool
OpenStax calls a multiple a snapshot in time that can't easily show how a company grows. If profit is climbing fast, shrinking or lumpy, one multiple hides that. The discounted cash flow calculator values each year's cash separately instead.
The calculator also needs a positive profit. A loss-making business has no earnings to multiply, so value it on its assets or its future cash.
Buying with borrowed money? SBA rules let a 7(a) loan pay for all or part of a business. The business loan calculator shows the monthly payment.
Sources
- OpenStax (Rice University), Principles of Finance 2e, 11.1 Multiple Approaches to Stock Valuation
- OpenStax (Rice University), Principles of Finance 2e, 11.2 Dividend Discount Models (DDMs)
- IRS, Sale of a Business (last reviewed February 10, 2026)
- IRS, Instructions for Form 8594 (Rev. November 2021)
- eCFR, 13 CFR 120.202: Loans for changes of ownership (as of September 24, 2026)