What a small business is worth
Most small businesses change hands at a multiple of earnings. This calculator applies that multiple and then subtracts net debt, because the buyer takes on the borrowings along with the trade.
The formula
Worked example: $200,000 of earnings at 4×
- Enterprise value: $800,000
- With $150,000 of net debt, equity value: $650,000
The multiple carries almost all the uncertainty. Everything below is about why one business gets 3× and another 6×.
What earnings figure to use
For an owner-operated business the convention is seller's discretionary earnings: net profit plus the owner's salary, personal expenses run through the business, interest, tax and depreciation. It answers what a new owner-operator would actually have.
Larger businesses with management in place are valued on EBITDA instead, because the buyer is not replacing the owner's labour. Using the wrong base changes the answer by more than any argument about the multiple.
What moves the multiple
| Multiple | Typically |
|---|---|
| 1–2× | Owner is the business; revenue leaves with them |
| 2–3× | Small, concentrated customer base, thin records |
| 3–5× | Established, documented, some management depth |
| 5–8× | Recurring revenue, real barriers, clean books |
The largest single discount is owner dependence. If the relationships, the pricing and the technical knowledge sit with one person, a buyer is purchasing a job rather than an asset.
Customer concentration
A business where one client is 40% of revenue does not get an average multiple. The buyer prices the risk that the client leaves after the sale, and frequently structures part of the payment to depend on that client staying.
Below roughly 10% per customer, concentration stops being a discussion point.
Why the price is rarely paid in cash
Small business sales commonly split into cash at completion, a seller note paid over two to three years, and an earn-out tied to performance. A $650,000 headline can be $400,000 now and $250,000 conditional.
Compare offers on the cash portion and the conditions attached to the rest, not on the total. Two identical headline prices can differ by a hundred thousand in what actually arrives.
What this calculator leaves out
Working capital, which is normally delivered at a normal level and adjusted at completion. Also property, which is often valued and sold separately, and any goodwill that depends on a lease being transferable.
Preparing a business to be sold
The multiple responds to a small number of things, and most of them take two to three years to change. Documented processes, a management layer that is not the owner, contracted rather than repeat revenue, and three years of clean, reviewed accounts.
The last one is worth naming plainly. Businesses that have minimised profit for tax purposes get valued on the profit they reported, not on the profit they could have shown. Two years of reporting real numbers before a sale usually raises the price by more than the extra tax paid.
Related calculators
- EBITDA multiple calculator — the larger-company convention
- Discounted cash flow — valuation from projected cash rather than a multiple
- Net debt calculator — the deduction that turns enterprise value into equity value