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Business valuation explained (US)

A valuation estimates what a buyer might pay under stated assumptions. It is not a guaranteed offer. This page covers the earnings measures used on Main Street and larger deals, asset vs stock sale, what moves the multiple, and why you should still get a professional opinion.

SDE for Main Street, EBITDA for larger deals

Main Street and smaller owner-operated businesses are commonly valued using Seller’s Discretionary Earnings (SDE): pre-tax profit plus owner compensation and benefits, interest, non-cash expenses and agreed one-time or personal add-backs. The buyer is often an individual who will replace the owner’s labor.

As businesses get larger — especially with management teams already in place — buyers more often use EBITDA (or adjusted EBITDA) and apply a different multiple range. Asset-heavy or distressed situations may lean more on asset or liquidation approaches. Rules of thumb are a starting point only; lenders and sophisticated buyers will rebuild the numbers themselves.

Asset sale vs stock sale

In an asset sale, the buyer purchases selected assets and typically leaves unwanted liabilities behind; contracts and licenses may need assignment. In a stock (share) sale, the buyer acquires the entity. Sellers often prefer stock sales for tax reasons; buyers often prefer asset sales for stepped-up basis and risk control. Many LOIs specify structure early because it changes both price and after-tax proceeds.

What drives the multiple

Multiples tend to rise with size, growth, recurring revenue, customer diversity, documented systems, and low owner dependence. They tend to fall with concentration risk, weak books, declining trends, regulatory problems, or a business that cannot run without the seller. How the purchase price is financed (cash, bank/SBA debt, seller note, earn-out) also affects what a buyer can pay.

Caution — get a professional valuation

Published averages and online estimators rarely match your facts. Have a CPA, valuation professional or experienced broker rebuild earnings and test market evidence before you set an asking price.

Federal (and sometimes state) tax results depend on asset vs stock structure and on how price is allocated among asset classes — some items can be taxed as ordinary income rather than capital gains. Get professional tax advice before you agree structure in an LOI.