How to Value a Business You Want to Buy (2026)

Step 1: Recast the financials to find real earnings

You cannot value a small business off its tax return net income. Owners legitimately run personal expenses through the company and pay themselves in ways that suppress reported profit. The fix is a recast (also called normalizing or adjusting the financials): you add back to net income everything a new owner would not have to pay.

To get to SDE — seller's discretionary earnings — start with pre-tax net profit and add back the owner's salary and payroll taxes, interest expense, depreciation and amortization, and any genuinely discretionary or one-time costs: the owner's vehicle, personal travel, a family member on payroll who does no work, a lawsuit settlement that won't repeat. Then subtract anything the seller conveniently left out, like a market-rate wage for unpaid family labor or deferred maintenance you'll have to fund immediately.

SDE assumes one full-time working owner. If you plan to hire a manager instead of running the business yourself, subtract that manager's fully loaded salary from SDE — what's left is closer to EBITDA, and it's the honest number for an absentee deal.

Step 2: Pick the right earnings base

• Use SDE for owner-operated Main Street businesses — a single laundromat, a landscaping company, a salon, a local HVAC shop. Typically these have under about $1M in adjusted earnings.
• Use EBITDA when the business already has a general manager and a real org chart, so the buyer's own labor isn't part of the return.
• Use monthly net profit for online businesses, because that's how digital marketplaces quote them. Content sites, ecommerce brands, and small SaaS are usually listed at a multiple of trailing-twelve-month monthly profit.

Whichever base you use, insist on a trailing twelve months figure, not a cherry-picked best year. Then look at the three-year trend: the same $200K of SDE is worth meaningfully more if it grew from $150K than if it fell from $260K.

Step 3: Choose a multiple, then adjust it

Multiples are a market observation, not a law. As a starting point in the U.S. small-business market: Main Street businesses commonly transact somewhere around 2x–4x SDE; businesses with management depth and cleaner reporting move into the 4x–6x EBITDA range and higher as size increases; online businesses are usually quoted at 30x–45x monthly net profit (about 2.5x–3.75x annual).

Then adjust for the specifics. Push the multiple up for contracted or subscription revenue, a diversified customer base, documented systems, a transferable lease, and staff who will stay. Push it down — hard — for a single customer who is a quarter of revenue, a licence or contract that doesn't transfer, equipment near the end of its life, a landlord who won't renew, or a business whose margins are propped up by the owner working 70 unpaid hours a week.

Step 4: Sanity-check against revenue and against comparables

People search for how to value a business based on revenue because revenue is the one number sellers share freely. It's a weak proxy: two businesses with identical revenue can differ 3x in value on margin alone. Use it as a guardrail. If your earnings-based number implies a price wildly out of line with what comparable businesses in the same industry and size band are asking, find out why before you assume you're the smart one.

The cheapest source of comparables is the marketplaces themselves. Filter listings by industry, geography, and cash flow, and read fifty of them. You'll quickly learn what a $200K-SDE HVAC company asks in your region versus what a $200K-SDE restaurant asks — and the gap between them is the market pricing risk, not sentiment.

Step 5: Separate price from deal structure

Price is only half of value. A $600K price with 10% down, an SBA 7(a) loan, and a $100K seller note payable over five years can be a better outcome for you than $520K all cash. Structure also lets you handle disagreement about the future: if the seller insists their growth story justifies a higher number, put part of the price in an earnout tied to results you can both verify. When financing an acquisition, remember that debt service comes out of the same SDE you're valuing, so run the coverage math before you agree to a headline number.

Valuation mistakes buyers make

• Accepting the seller's add-backs without documentation. Every add-back needs a receipt or it isn't real earnings.
• Valuing the best year instead of the trailing twelve months.
• Forgetting working capital — if you buy the business with an empty bank account, you fund payroll from your own pocket on day one.
• Paying an absentee-quality multiple for an owner-dependent business.
• Ignoring capital expenditure that's already overdue: a roof, a fleet, or a $60K piece of equipment on its last year.

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