Complete Guide to Business Valuation Methods

What Are the Main Business Valuation Methods?

There are five business valuation methods that matter for small business owners: SDE multiples, EBITDA multiples, revenue multiples, discounted cash flow (DCF), and asset-based valuation. Each method answers a different question, and the right one depends on your business size, industry, growth, and who is buying. For a grounding on the earnings side, review SDE vs EBITDA before going deeper.

Ninety percent of businesses under $5M in revenue sell on an SDE or EBITDA multiple. The other methods exist, but they rarely drive the final number. Understanding all five keeps you from being surprised when a buyer, broker, or lender uses one you didn't expect.

How Each Valuation Method Works

SDE multiple. Seller's Discretionary Earnings times an industry multiple. Used for businesses under roughly $2M in SDE where a single owner-operator is buying. Typical range: 2.0x to 4.0x. This is the default method for Main Street deals.

EBITDA multiple. Earnings Before Interest, Taxes, Depreciation, and Amortization times an industry multiple. Used for businesses above $2M in EBITDA where private equity or strategic buyers are in the mix. Typical range: 4.0x to 8.0x for lower middle market, higher for specialty categories.

Revenue multiple. Top-line revenue times a small multiplier. Used primarily for SaaS (3x-8x ARR), recurring-revenue service businesses, and high-growth companies where earnings are intentionally suppressed. Today's companion post, SDE multiple vs revenue multiple, covers when each one should lead.

Discounted cash flow (DCF). Projects future free cash flows for 5-10 years, discounts them back to present value using a weighted average cost of capital, and adds a terminal value. Used by sophisticated buyers as a cross-check and for businesses with clear, projectable cash flows.

Asset-based valuation. Fair market value of tangible and intangible assets minus liabilities. Used when a business is being liquidated, when earnings are minimal or negative, or for asset-heavy industries like trucking, equipment rental, and real estate holdings.

A Real Example: Four Methods, Four Different Answers

Consider a 12-year-old HVAC company with $3.5M in revenue, $650K in SDE, $550K in EBITDA, $800K in working capital, and $400K in trucks and equipment. Here is what each method produces:

• SDE multiple at 3.2x: $650K × 3.2 = $2,080,000
• EBITDA multiple at 4.0x: $550K × 4.0 = $2,200,000 (excluding working capital)
• Revenue multiple at 0.6x: $3.5M × 0.6 = $2,100,000
• Asset-based floor: $400K equipment + $800K working capital = $1,200,000 floor

The three earnings-based methods land within 6% of each other — that is the credibility check sophisticated buyers run. The asset-based number serves as the floor below which the seller should never go. Running those same numbers through the business valuation calculator produces the same converging range in under a minute.

How the Methods Compare

The methods answer different questions. SDE and EBITDA multiples answer "what is this business worth based on what it actually earns?" They are simple, widely used, and backed by thousands of comparable transactions. The weakness is that they are backward-looking — a business growing 30% per year is worth more than a flat business with the same trailing earnings, but the multiple only partially captures that.

Revenue multiples answer "what is this revenue stream worth?" They work for high-growth or recurring-revenue models where profitability is intentionally suppressed. They fail for traditional service businesses where margins vary dramatically between companies.

DCF answers "what is the present value of future cash flows?" It is the most theoretically correct method and the least used in small business sales because it depends on growth projections that are almost always wrong. Buyers use it as a sanity check against multiple-based valuations.

Asset-based valuation answers "what would this business be worth if we broke it up today?" It sets a floor. If your earnings-based valuation comes in below the asset-based number, either shut down and liquidate or fix the earnings problem before selling. For more on how different buyer types weigh these methods, see what is a business valuation.

How Each Method Changes Your Valuation

The method you use can change your valuation by 30% to 100% for the same business. A roofing company with $500K in SDE might be worth $1.5M on a 3.0x SDE multiple or $2.0M on a 4.0x multiple — a $500K swing driven entirely by how defensible the earnings are, not by any change to the underlying business.

Three factors move your multiple up within a method:

• Revenue quality: recurring revenue, long customer tenure, contracted backlog
• Operational independence: a manager in place, documented processes, minimal owner involvement
• Growth trajectory: consistent year-over-year growth above industry average

The same factors that move multiples also move the methodology buyers use. A $1M SDE business with 60% recurring revenue and a manager in place might get valued on a revenue multiple by a PE firm instead of an SDE multiple by an individual buyer — and jump from $3.5M to $5M.

What This Means for Your Exit

If you want the best price, know which method your most likely buyer will use — and optimize for it. Individual buyers use SDE multiples. PE firms use EBITDA multiples. SaaS acquirers use revenue or ARR multiples. Strategic acquirers use whatever makes the deal math work. Your exit plan should target a specific buyer profile and a specific method two to three years before the sale. Start with our exit planning framework to align your business around the method that pays the most.

Run your numbers under at least three methods before you list. If they converge, your price is defensible. If they diverge widely, figure out why before a buyer does it for you — usually through a Quality of Earnings report that cuts your valuation by 15% to 25% mid-deal. YourExitValue helps owners model all four earnings-based methods side by side so you walk into every buyer meeting with defensible numbers.