What Is My Business Worth? A Straightforward Guide for First-Time Sellers

If you're a business owner considering selling for the first time, one of the most important questions on your mind is likely, "What is my business worth?" Understanding the value of your business is critical not only for setting a realistic asking price but also for negotiating with confidence and planning your next steps. In this guide, we'll break down the basics of business valuation in plain language and help you understand what factors impact the final number.

Why Valuation Matters

A proper valuation helps you:

• Price your business accurately

• Attract serious, qualified buyers

• Avoid leaving money on the table

• Navigate negotiations with confidence

• Plan for retirement, reinvestment, or your next chapter
  

Many business owners either overvalue their business due to emotional attachment or undervalue it due to lack of clarity. A structured valuation process helps you find the sweet spot that balances market demand with fair value.

Common Valuation Methods

1. Seller’s Discretionary Earnings (SDE) Method

This is the most common method used for small to mid-sized, owner-operated businesses. SDE is essentially your net profit plus any benefits and perks that a new owner could reasonably expect to receive.

Formula: Net Profit + Owner’s Salary + Depreciation + Interest + One-Time Expenses = SDE

Once SDE is calculated, it’s multiplied by a market-based multiple (often ranging from 1.5x to 4x for smaller businesses) depending on the industry, stability, and growth potential.

2. EBITDA Method

Used more often in larger or investor-targeted businesses, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) removes owner-specific adjustments for a more objective view of operating performance.

Formula: Net Income + Interest + Taxes + Depreciation + Amortization = EBITDA

Multiples for EBITDA are often higher, especially in industries with recurring revenue or scalable infrastructure.

3. Asset-Based Valuation

Best used for companies with significant tangible assets, this method looks at the market value of all business assets (equipment, inventory, property, etc.) minus liabilities.

This approach is less common for service businesses or companies where the value lies in goodwill, brand, or customer relationships.

Key Factors That Impact Business Value

1. Financial Performance

Buyers want to see clean, consistent, and growing financials. Tax returns, P&Ls, and balance sheets that show a stable or upward trend in revenue and profit command higher valuations.

2. Industry Trends

Some industries trade at higher multiples due to growth potential or stability. For example, essential services, healthcare, and home improvement businesses may see stronger buyer interest than seasonal or trend-driven ventures.

3. Customer Concentration

A business with a diversified customer base is more valuable than one that depends heavily on a single client. High customer concentration can pose a risk to buyers.

4. Owner Involvement

If the business heavily depends on you, the value may be lower. The easier it is for a new owner to step in without disrupting operations, the better.

5. Lease & Location

A favorable long-term lease, good location, or real estate included in the deal can positively influence valuation.

6. Growth Potential

Buyers pay more when they see clear pathways to scale. Opportunities for expansion, untapped markets, or underutilized marketing channels are all value boosters.

Common Mistakes to Avoid

• Using Revenue Instead of Profit: Buyers buy cash flow, not just gross sales.

• Neglecting Financial Documentation: Incomplete or messy books can tank your valuation.

• Ignoring Add-Backs: Expenses that won’t transfer to the new owner (like your personal car payment) should be “added back” to reflect true earnings.

• Waiting Too Long to Sell: Timing is key. Selling when performance is strong increases value and buyer interest.

The Role of a Business Broker

A qualified business broker will help you:

• Organize your financials for evaluation

• Determine a reasonable price range based on real market data

• Prepare a Confidential Information Memorandum (CIM)

• Market your business discreetly

• Qualify buyers and facilitate negotiations

Brokers bring not just valuation expertise but also negotiation support and confidentiality controls that help protect your business during the sale process.

Real-World Example

Let’s say your business had a net profit of $200,000 last year. You also paid yourself $100,000 in salary, expensed $10,000 in personal travel, and had a $5,000 one-time legal expense.

SDE = $200,000 + $100,000 + $10,000 + $5,000 = $315,000

If your industry commands a 2.5x multiple, your estimated business value would be: $315,000 x 2.5 = $787,500

This is a simplified model, but it shows how financial performance and industry norms come together to influence pricing.

Final Thoughts

Knowing what your business is worth is the first step toward a successful exit. Even if you’re not planning to sell right away, getting a baseline valuation can help you identify areas to improve and maximize your future payoff. Every business is unique, and the best way to understand your company’s value is to speak with an experienced broker who knows your industry and market.

At The Firm, we specialize in helping owners navigate this process with clarity and confidence. If you’re curious what your business might be worth, we offer confidential consultations with no obligation.

Your business has value. Let’s find out what it’s truly worth.