Home › Resources › How to value a small business
A practical guide ยท for owners who want a numberHow to value a small business, using the method a buyer will actually use
You want a number. There are three ways to get one, and they give three different answers, which is why most owners walk out of a first meeting with an advisor more confused than they walked in. One of the three is the one a buyer will use on a business like yours, and you can run it yourself this afternoon.
The short answer. A private business in the $5M to $50M range is almost always valued on a multiple of adjusted profit. Asset value sets a floor under that number. Discounted cash flow is what a sophisticated buyer runs in the background to check the multiple. Learn the first method properly and know what the other two are for, and you will understand every offer you ever get.
Which method will a buyer use on my business?
It depends on what the business is. A company that makes its money from people, contracts and know-how gets valued on earnings. A company whose value sits in trucks, land and stock gets valued on assets, with earnings as a check. A large or fast-growing company with reliable forecasts gets a discounted cash flow model, usually alongside the multiple.
| Method | What it does | When it applies | What it tells you |
|---|---|---|---|
| Earnings multiple | Adjusted profit times a number that reflects your industry, size and risk | Nearly every profitable private company from $5M to $50M | What a buyer will pay for the future cash flow |
| Asset based | Assets minus liabilities at fair value | Capital heavy businesses, or any business earning less than its assets should | The floor. Below this, a buyer is better off buying the equipment |
| Discounted cash flow | Five years of projected cash flow, discounted back to today for risk | Larger deals, financial buyers, businesses with forecastable revenue | Whether the multiple is justified by the numbers underneath it |
If you run a distribution, manufacturing, construction, services or trade business, the first row is your world. Spend your time there.
How do I work out adjusted profit?
This is the part most owners get wrong, and it is the part that matters most, because every dollar of adjusted profit gets multiplied.
Start with operating profit from your accounts. Then rebuild it into the profit a new owner would actually see. That means adding back costs that were about you rather than the business, and taking out costs the business will have to carry once you are gone.
Common add backs:
- Your salary and any bonus you paid yourself
- Family members on the payroll who do not do a full job at a market wage
- Personal expenses that run through the company: vehicles, travel, phones, memberships
- One-off costs that will not repeat: a lawsuit, a bad debt, a move, a failed product
- Rent above or below market if you own the building through another entity
Common deductions:
- A market-rate salary for whoever replaces you. If you do the work of a general manager and a sales director, that is two salaries, not one
- Any cost you have been quietly not paying: deferred maintenance, underpaid staff, a software licence you never renewed
Write every line down with the evidence next to it. A buyer will ask for the receipts, and an add back you cannot prove is an add back that comes off the price during due diligence.
What multiple should I use?
For a lower mid-market private company, adjusted profit typically sells for somewhere between three and four and a half times, before size and risk adjustments. Professional services sits at the lower end. Manufacturing and healthcare services sit at the upper end. The multiple rises as the business gets bigger, so a $30M company starts higher than a $6M one in the same trade.
That range is where the whole negotiation happens. The profit number is arguable at the edges. The multiple can move by a full point on things that have nothing to do with the accounts:
- Whether the business runs without you
- Whether one customer is a quarter of your revenue
- Whether next year's revenue is contracted or hoped for
- Whether your management team has a reason to stay
- Whether your books would survive an outside accountant reading them
Every one of those is a discount, applied one after the other, and they compound. The guide to why the number is lower than you think goes through them line by line.
A worked example
These figures are illustrative. Take a wholesale distributor turning over $12M.
| Line | Amount | Why |
|---|---|---|
| Operating profit in the accounts | $1,400,000 | Starting point |
| Add back owner's salary | + $120,000 | Paid to you, not a market cost |
| Add back personal vehicles and travel | + $60,000 | Not a cost of running the business |
| Add back one-off legal dispute | + $40,000 | Will not recur |
| Deduct market-rate general manager | - $180,000 | Someone has to do your job |
| Adjusted profit | $1,440,000 | The number that gets multiplied |
At three and a half times, that business is worth about $5.0M. Now suppose the buyer finds that every major customer relationship is yours personally, and that your general manager has never run a month without you. The multiple drops to three. The business is now worth about $4.3M.
That $700,000 is the price of the business needing you. It is also the single most fixable line in the whole calculation, which is why the estimator itemises it.
Can I value my business on revenue instead?
You can, and you will see revenue multiples quoted in some places. They are used in software with recurring subscriptions, in some agency deals, and as a rough rule of thumb in a few trades where every business runs on the same margins.
For most owner-led companies they are the wrong tool. Two businesses can have identical revenue and one of them makes three times the profit. A buyer is buying the profit. If you open a conversation by quoting a revenue multiple, an experienced buyer hears that you have not done this before and prices accordingly.
Use revenue multiples for one thing only: a quick sanity check against deals you have heard about in your own industry.
When does asset value matter?
Two situations. The first is a capital heavy business, where the fleet, plant or property is a large share of what a buyer is getting. The second is a business earning less than its assets ought to earn, where a buyer would rather buy the equipment and walk away from the goodwill.
Asset value is the floor. Anything a buyer pays above it is goodwill, which is the market's word for the customers, the people, the systems and the reputation. In a healthy business, goodwill is most of the price. If a valuation comes back close to asset value, that is a message about the earnings, not about the assets.
Do not confuse book value with fair value. The truck fully written off in your accounts may be worth $40,000 on the open market, and the building you bought in 2004 is certainly not worth what the balance sheet says.
What does discounted cash flow add?
Discounted cash flow projects the business five years forward, estimates the cash it throws off each year, and discounts each year back to today at a rate that reflects how risky those projections are. Risky business, high discount rate, lower value.
For a company your size it is rarely the headline method. It is the check. A financial buyer builds the model to test whether the multiple they are about to pay is supported by what the business will actually generate. The part that matters for you: if the business depends on you, your projections get discounted harder, because the buyer does not believe year three happens without you in the building.
Do not lead with a DCF. Do have three years of history clean enough that someone else can build one.
Why do three methods give three numbers?
Because they measure different things. Asset value measures what you own. Earnings multiples measure what the business earns for its owner. Discounted cash flow measures what a buyer believes about the future. They are supposed to differ.
An advisor will reconcile them, usually by leaning on the multiple and using the other two to argue it up or down. The number you will actually receive is not any of the three. It is whichever number survives due diligence, which is a separate process that starts after the offer and is where most of the value leaks out.
So stop asking which method is right, and start asking which of your discounts you can remove before anyone applies a method at all.
What should I do before paying for a formal valuation?
A formal valuation from a qualified appraiser is worth having before any real transaction. It is a waste of money if the inputs are a mess. Do this first:
| Do this | Why it moves the number |
|---|---|
| Three years of accounts a stranger could read | Every unexplained line is a discount |
| An add back schedule with evidence for each line | Unproven add backs come off during due diligence |
| A customer list with revenue share per customer | Concentration is the second biggest discount after owner dependence |
| An honest list of what stops if you are away for a month | This is what sets the multiple |
| Run the free estimator with those numbers | You see the range and each discount in dollars before anyone charges you |
Then get the appraisal. You will understand it, you will be able to argue with it, and you will know which of its assumptions you can still change.
Questions owners actually ask
What are the three ways to value a company?
The earnings multiple, which applies a market multiple to adjusted profit; the asset based method, which values what the company owns minus what it owes; and discounted cash flow, which projects future cash and discounts it for risk. Private businesses from $5M to $50M are almost always priced on the first, with the other two as checks.
How do I value a business based on revenue?
Multiply annual revenue by a multiple typical for the sector. It is common in subscription software and some agencies and rarely used elsewhere, because two businesses with the same revenue can make very different profit. For a services, trade, manufacturing or distribution company, use it only as a rough cross check against profit based methods.
How do I value a business based on profit?
Rebuild operating profit into adjusted profit: add back your salary, personal expenses and one-off costs, then deduct a market-rate salary for your replacement. Multiply by an industry multiple, typically three to four and a half times for a lower mid-market private company, then adjust down for owner dependence, customer concentration and unpredictable revenue.
How can I value my business quickly?
Take last year's operating profit, add back what you paid yourself and any personal costs, subtract what a manager would cost to replace you, and multiply by three and a half. That gives an order of magnitude in ten minutes. The free estimator on this site does the same with nine inputs and itemises the discounts.
Is EBITDA the same as adjusted profit?
Close, but not the same. EBITDA is earnings before interest, tax, depreciation and amortisation, straight from the accounts. Adjusted profit starts from there and normalises it: owner salary added back, personal expenses removed, one-off costs excluded, a replacement salary deducted. Buyers price the adjusted figure, and the adjustments are where the arguments happen.
Do I need a professional valuation before selling my business?
Before a real transaction, yes, from a qualified appraiser. Before that, no. A formal valuation on messy inputs gives you an expensive number you cannot use. Clean the accounts, build the add back schedule and run a free estimate first, so the appraisal confirms a number you already understand rather than delivering one you have to take on trust.
Why is my accountant's valuation different from the broker's?
They are answering different questions. An accountant usually values for tax or legal purposes using conservative methods and book figures. A broker estimates what a buyer might pay in the current market, and has an interest in the listing. Neither is the price. The price is what survives a buyer's due diligence.
Where Mind Shift fits
Mind Shift is not a valuation firm and we do not appraise businesses. We work with owners of $5M to $50M companies on strategic advisory and leadership, which in practice means removing the discounts before anyone applies a method: a business that runs without its owner, a management team with a reason to stay, and numbers that hold up when a stranger reads them.
Your accountant and a qualified appraiser handle the formal valuation. We do not give tax, legal or financial advice.
If you have run the estimator and the owner dependence line is the biggest discount, that is the conversation to bring.
Free. No pitch. Talk through where the business stands and what has to happen next.
Keep reading
© 2026 Mind Impact Ltd trading as Mind Shift. This guide is general leadership guidance, not legal, tax or financial advice. Last reviewed September 2026.