Most SME owners have a vague sense their business is worth something, but few have worked through the methodology to turn that sense into a defensible number. This guide walks through exactly how small-business valuation works – the four main methodologies, when each applies, and the five factors that actually move the number.
Why it matters, even if you're not selling
Most owners think about valuation only in the weeks before a sale. That’s usually too late. Your business value determines insurance sizing, buy-sell agreement triggers, tax planning options, succession feasibility, and how much dilution you’re taking when you raise. A once-a-year check is the minimum rhythm any serious owner should keep.
The good news: getting a methodology-grounded number takes about 15 minutes once a year. The bad news: most owners either skip it entirely or rely on a gut estimate that’s typically off by 30–50%.
The four main valuation methodologies
Every rigorous business valuation uses at least two of four methodologies, usually more. Each captures something different about the business; the final number is typically a weighted blend.
1. Revenue multiple
The simplest approach: multiply annual revenue by an industry-specific factor. A SaaS business might trade at 6× revenue; a specialty retailer at 0.8×. Industry multiples are published by academic sources (we use Damodaran NYU Stern quarterly data) and trade at fairly consistent ranges.
The revenue multiple is particularly useful when a business isn’t yet profitable, or when current profit is temporarily suppressed by growth investment. It’s a floor method, not a full answer.
2. EBITDA multiple
The most common mid-market methodology: multiply EBITDA (earnings before interest, tax, depreciation, and amortisation) by an industry-specific factor. SaaS: typically 22× EBITDA. Professional services: 10.5×. Manufacturing: 9.5×.
EBITDA multiples are appropriate for profitable, going-concern businesses. Most buyer offers anchor on an EBITDA multiple, which is why the EBITDA calculator is one of the most important preparation tools for any owner thinking about sale.
3. SDE multiple (for owner-operated)
For owner-operated businesses under roughly $5M revenue, Seller’s Discretionary Earnings is the right metric. SDE adds back full owner compensation (not just the above-market portion) because a new owner is assumed to replace the owner’s working contribution either themselves or by hiring at market rate.
SDE multiples are typically 25–40% lower than EBITDA multiples for the same industry, because SDE is a larger underlying number.
4. Discounted Cash Flow (DCF)
The gold-standard methodology: forecast cash flows for 5 years, apply a terminal value, discount everything back at the weighted average cost of capital. DCF captures your specific business’s trajectory and risk profile in ways that multiple methods can’t.
DCF is also the most assumption-heavy method. Small changes to growth rate, discount rate, or terminal multiple can shift the output by 30–50%. Which is why rigorous valuations always show best-case, base-case, and stress-case scenarios.
Which methodology applies to your business
A rough guide:
- Software / SaaS, high-growth businesses: Revenue multiple + DCF. EBITDA often isn’t meaningful yet.
- Owner-operated services businesses under $5M: SDE multiple primary, revenue multiple secondary.
- Profitable services / product businesses $5M+: EBITDA multiple primary, revenue multiple and DCF secondary.
- Asset-heavy businesses (property, manufacturing): Asset-based methodology plus EBITDA; DCF often secondary.
- Pre-profit businesses: Revenue multiple + DCF scenarios. EBITDA doesn’t work yet.
A rigorous valuation report shows all applicable methodologies and weights them by profile. Our Standard report applies 3 methodologies; the Detailed report adds full DCF with scenario modelling.
The five factors that actually move the number
Within any industry, two businesses with identical revenue can trade at multiples that differ by 2–3×. The gap comes from five factors:
1. Size
Larger businesses trade at higher multiples because they’re less risky. A business doing $5M in revenue typically commands a 15–25% premium over a $1M business in the same industry, all else equal. Below $500k revenue, multiples compress materially – sometimes to 30–50% below published industry medians.
2. Margin quality
A business at 25% EBITDA margin in an industry where average is 12% earns a meaningful premium. Buyers pay for demonstrated profitability, not just revenue.
3. Growth trajectory
Three years of steady growth puts you in a different bucket than three years of flat or declining revenue. At identical current-year numbers, the growing business can be worth 40–80% more.
4. Customer concentration
One customer representing 40%+ of revenue is treated as a risk discount – often 20–30% off the baseline multiple. Diversified customer bases command premiums.
5. Owner dependence
Businesses where the owner is integral to operations, customer relationships, and key decisions are worth materially less to a buyer who wants to step out of the operating role. This is often the single biggest value leak in SME valuations.
The mistakes owners make most often
Using one number instead of a range. No serious valuer delivers a single number. Always work with a range and negotiate within it.
Comparing to published public-market multiples. Public companies trade at 30–50% premiums to equivalent private SMEs because of liquidity, reporting quality, and scale. Applying public multiples to private SMEs is one of the most common errors.
Forgetting to normalise EBITDA. Reported EBITDA includes owner comp and discretionary costs. Normalising to a buyer-perspective EBITDA typically lifts the number by 15–40%.
Ignoring the 8 value drivers. A business with a score of 7/10 on the value-builder scorecard commands a meaningfully different multiple than one at 4/10 in the same industry. Most owners don’t know their score.
Getting a valuation too close to a sale event. The best valuation is done 12–24 months before a planned sale, so you have time to improve the 2–3 weakest drivers before buyers see the business.
How to actually get a valuation
Three paths, depending on stake and stage:
Free and rough (5 minutes): Use our Quick Valuation Calculator. Gives you a 3-method range in the browser with no sign-up. Good enough for initial planning conversations.
Methodology-grounded report ($199–$399): Our Standard or Detailed reports deliver full working in 10–15 minutes. Suitable for most planning, annual refresh, early-stage buyer conversations, insurance sizing, and buy-sell agreements.
Qualified valuer engagement ($3k–$15k+): Required for formal tax submissions, contested divorce proceedings, §409A in the US, ESOPs, and larger M&A transactions. We’re transparent about where our reports reach their limit; see our disclaimer for details.