How to Calculate the Value of a Business: Step by Step

I'm going to walk you through exactly how to calculate what your business is worth, step by step, with a real example. No hand-waving, no "it depends" without explaining what it depends on. By the end of this, you'll have a framework you can apply to your own business today.

The methodology I'm using here is the same one M&A advisors use when they price a business for market. It's called the comparable transactions approach, and it works by analyzing what similar businesses have actually sold for and applying those benchmarks to your specific situation.

Step 1: Determine Your Earnings Metric

Before you can apply a multiple, you need to know what you're applying it to. The two main options for most businesses are SDE and EBITDA. The choice depends primarily on size.

Use SDEif you are the owner-operator and the business generates less than roughly $1M in EBITDA. SDE captures the total financial benefit of ownership — your salary, your benefits, your perks, plus the business's operating profit. Most small business buyers are buying a job along with a business, so SDE is the relevant metric.

Use EBITDAif the business has professional management (or could), generates $1M+ in EBITDA, or is being marketed to institutional buyers like PE firms. EBITDA strips out the owner's personal compensation and replaces it with a market-rate salary, so it represents the business as a standalone operation.

For a complete breakdown of when to use each, read our SDE vs EBITDA guide.

Step 2: Calculate Your SDE or EBITDA

This is where most people get it wrong. They use net income from their tax return, which dramatically understates the earning power of most small businesses. The whole point of SDE and adjusted EBITDA is to normalize your financials to show what the business truly earns.

Let me use a real example. Say you own a plumbing company with $800,000 in revenue. Here are your financials:

Line Item	Amount
Revenue	$800,000
Cost of goods (materials, subcontractors)	($280,000)
Employee wages (3 plumbers + office admin)	($195,000)
Rent, insurance, utilities	($48,000)
Vehicle expenses (4 trucks)	($36,000)
Marketing	($22,000)
Other operating expenses	($18,000)
Owner salary	($110,000)
Owner health insurance	($15,000)
Owner auto (personal truck through business)	($12,000)
Depreciation	($14,000)
Interest on line of credit	($5,000)
Net Income (per tax return)	$45,000

Now let's calculate SDE by adding back the owner-specific and non-cash items:

Add-Back	Amount
Net income	$45,000
+ Owner salary	$110,000
+ Owner health insurance	$15,000
+ Owner auto	$12,000
+ Depreciation	$14,000
+ Interest	$5,000
SDE	$201,000

Your tax return says $45K in net income. But the business actually provides $201K in total financial benefit to one owner-operator. That's the number a buyer cares about, because that's the cash flow available to pay themselves and service the acquisition debt. For the complete guide to add-backs, see our adjusted EBITDA add-backs article.

Step 3: Find the Right Multiple for Your Industry

Now you need to find what similar businesses have sold for. Plumbing companies in the small business range (under $5M revenue) typically trade at 2.0-3.0x SDE, based on our transaction data. The median is around 2.3x.

Where does this data come from? From actual completed transactions — deals where a plumbing company was sold and the price and financial metrics were reported to transaction databases. The more transactions in the dataset, the more reliable the range. Our database includes 25,000+ transactions across 90+ industries.

Important: don't use public company multiples as a reference. When you see that a publicly traded home services company trades at 15x EBITDA, that has nothing to do with your plumbing company. Public companies have liquidity, scale, diversification, and access to capital that small businesses don't. Apples and aircraft carriers.

Step 4: Apply Adjustment Factors

The base range for plumbing is 2.0-3.0x SDE. Now you need to determine where within that range your business falls. Let's assess our example plumbing company on the key factors:

Growth:Revenue has grown from $650K to $800K over the last three years — about 7% annual growth. That's solid for a plumbing company. This pushes the multiple up modestly. Adjustment: +0.2x

Owner dependency: The owner still does about 30% of the plumbing work himself, answers all after-hours calls, and handles all estimates for large jobs. There are three employees, but the business would struggle without the owner for more than a week. This is a moderate dependency. Adjustment: -0.2x

Customer concentration: No single customer represents more than 5% of revenue. The business serves about 400 residential customers and 30 commercial accounts per year. This is healthy diversification. Adjustment: neutral

Revenue quality: About 25% of revenue comes from maintenance contracts (water heater service plans, annual inspections). The rest is on-demand service calls and project work. The recurring component is meaningful but not dominant. Adjustment: +0.1x

Equipment and assets: Four trucks (two are newer, two have 120K+ miles), standard plumbing tools. Nothing extraordinary, but serviceable. Equipment will need replacement investment within 2-3 years. Adjustment: -0.1x

Starting from the industry median of 2.3x, our adjustments net to zero: +0.2 (growth) - 0.2 (owner dependency) + 0.0 (concentration) + 0.1 (recurring) - 0.1 (equipment) = 2.3x. Not every business gets a convenient net-zero adjustment, but this one is a fairly typical plumbing company.

Step 5: Calculate the Range

Applying the adjusted multiple to our SDE:

Low end (conservative): $201,000 x 2.0 = $402,000
Mid-point (most likely): $201,000 x 2.3 = $462,300
High end (optimistic): $201,000 x 3.0 = $603,000

So this plumbing company is worth approximately $400,000 to $600,000, with the most likely sale price around $460,000. That's the range a buyer would expect to pay and a broker would use to price the listing.

The Sanity Check: Does It Work for a Buyer?

Here's a step most guides skip, but it's one of the most important. Let's check whether a buyer can actually afford this business at the calculated price.

Assume a buyer purchases at $460,000 using an SBA 7(a) loan with 10% down. The loan amount is $414,000 at approximately 10.75% over 10 years. Monthly payment: roughly $5,650, or $67,800 per year.

The buyer's cash flow math:

SDE available: $201,000
Minus annual debt service: ($67,800)
Cash available to owner: $133,200

That $133K represents the buyer's total compensation — salary plus profit. For a plumbing company owner, that's a reasonable living, and the debt service coverage ratio (SDE / debt payment) is 2.97x, well above the SBA minimum of 1.25x. The deal works financially, which confirms the valuation is realistic.

If this sanity check had failed — if the buyer couldn't earn a reasonable living after debt service, or the DSCR was below 1.25x — that would signal the valuation is too high for the buyer pool. This happens sometimes with inflated asking prices, and it's why businesses sit on the market for years.

What Could Change This Number

A few scenarios that would materially change the valuation of this plumbing company:

If the owner reduced his involvement to management onlyand hired another plumber to handle his workload, the owner dependency adjustment would flip positive. Even though SDE might decrease slightly (new plumber's salary), the multiple would increase enough to more than compensate. This is one of the highest-ROI moves a seller can make 12-18 months before a sale.

If recurring revenue grew to 40-50% of total revenue through expanded maintenance contracts, the revenue quality adjustment would push the multiple to the upper end of the range. Recurring revenue is the single most reliable way to command a premium in any service business.

If the business grew to $1.5M+ in revenue with $400K+ SDE, the buyer pool would expand to include more sophisticated acquirers. At that size, the multiple itself increases because the business is lower risk and more attractive to a wider range of buyers.

Applying This to Your Business

The five-step process works regardless of industry:

Determine the right earnings metric (SDE, EBITDA, or industry-specific)
Calculate that metric with proper add-backs
Find the comparable transaction multiple range for your industry and size
Adjust for your specific business characteristics
Calculate the range and sanity-check against buyer affordability

The hard part is steps 3 and 4 — finding reliable comparable data and making honest adjustments. This is where most business owners benefit from tools or advisors, because the data isn't readily available and the adjustments require market experience to calibrate correctly.

Our valuation tool automates this entire process. It identifies the right methodology for your industry, pulls comparable transactions from our database of 25,000+ real deals, applies size and industry-appropriate adjustments, and gives you a defensible range backed by actual transaction data. The same analysis an advisor charges thousands to produce, available as a starting point in about two minutes.