The Business Valuation Formula (With Worked Examples)

The one core formula

Nearly every small business valuation, however it is dressed up, comes down to the same basic equation: value equals earnings multiplied by a multiple. You pick a normalized earnings number for the business, and you multiply it by a factor that the current market is willing to pay for businesses of that type, size, and risk profile.

The formula itself is simple arithmetic. A business with $250,000 of earnings at a 3 times multiple is worth $250,000 times 3, or $750,000. The real work in valuation is not the multiplication, it is deciding which earnings number belongs in that formula and defending the multiple you apply to it.

Almost every disagreement about what a business is worth is really a disagreement about one of those two inputs, not about the math connecting them.

Which earnings number to use

For small, owner-operated businesses, generally those with earnings under roughly $1,000,000 to $2,000,000, the standard earnings figure is seller's discretionary earnings, or SDE. SDE starts with net profit and adds back the owner's salary, personal perks, and one-time or non-cash expenses, producing a number that reflects the total benefit one working owner gets from the business each year.

For larger, more institutionalized businesses with a management team already in place, the standard figure shifts to EBITDA, earnings before interest, taxes, depreciation, and amortization. EBITDA does not add back a full owner's salary, because it assumes professional managers are being paid a market wage regardless of who owns the company.

A handful of fee-based industries skip earnings multiples altogether and price off a different metric: revenue for accounting firms, commission for insurance books, or assets under management for wealth management practices. These industries have historically consistent margins, so buyers find it simpler and more reliable to price directly off the revenue-like metric instead of profit.

Where the multiple comes from

The multiple is the market's collective opinion about risk and growth for a business like yours. It gets set by what similar businesses have actually sold for recently, adjusted up or down for how attractive your specific business is relative to the typical one in its category.

Multiples move with size, with predictability of revenue, with how dependent the business is on the owner, and with the general appetite of buyers and lenders at the time. The same business can be worth more in a strong deal market than a weak one, purely because the typical multiple buyers are paying has shifted.

Because multiples are set by real transaction activity, not a fixed rule, they should always be treated as typical ranges rather than guarantees. Two businesses with identical earnings can reasonably sell at different multiples.

Typical multiple ranges by industry

Small, owner-run businesses in general: roughly 2 to 4 times SDE. HVAC and similar home service companies: roughly 3.5 to 7 times EBITDA, with size and recurring maintenance contracts pushing toward the top of that range. Dental practices: roughly 4.5 to 6 times adjusted profit, depending on patient base, location, and whether specialty services are offered.

Property and casualty insurance books: roughly 2 to 3.5 times annual commission. Registered investment advisory, or RIA, practices: roughly 1.5 to 3 percent of assets under management. Accounting and tax practices: roughly 0.9 to 1.35 times annual revenue.

Ecommerce businesses: roughly 2.5 to 3.5 times SDE, often adjusted for how reliant the business is on a single sales channel. Restaurants: roughly 2 to 3 times SDE, plus the resale value of furniture, fixtures, and equipment (FF&E) on top. Trucking and logistics companies: roughly 3 to 4.5 times EBITDA, adjusted up or down for the value of the owned fleet and any outstanding equipment debt.

These figures are typical starting ranges drawn from how these industries commonly get priced, not promises about what any specific business will fetch. Your actual multiple depends on your specific numbers, customer base, and current buyer demand.

Worked example 1: an SDE business

A residential cleaning company has $180,000 of SDE after add-backs, and comparable businesses of its size and customer mix in this space typically trade around 2.8 times SDE. Applying the formula: $180,000 times 2.8 equals $504,000. That is the estimated value using the core earnings-times-multiple formula.

Worked example 2: an HVAC EBITDA business

A regional HVAC company has grown past the point where SDE makes sense, since it has a general manager running day-to-day operations and the owner is only loosely involved. It reports $620,000 of EBITDA. Given its size, its mix of recurring maintenance contracts, and the current strength of demand for HVAC companies among buyers, a multiple of 5 times EBITDA is applied. The calculation: $620,000 times 5 equals $3,100,000 of estimated value.

If that same company had weaker recurring revenue and more one-off installation work, a buyer might instead apply a lower multiple of 4 times, producing $620,000 times 4, or $2,480,000, a reminder that the same earnings figure can support meaningfully different values depending on the quality of those earnings.

Worked example 3: an insurance commission book

A property and casualty insurance book generates $340,000 of annual commission revenue. Books like this, with a healthy renewal rate and a diversified set of carriers, typically trade around 2.5 times commission in the current market. The calculation: $340,000 times 2.5 equals $850,000 of estimated value.

This example uses commission, not profit, as the earnings figure, which is normal for this industry. Trying to apply an SDE-style multiple to this same book would produce a meaningless answer, since insurance books are conventionally priced off commission revenue rather than the agency's underlying profit.

Why identical earnings can get different multiples

Two businesses can report the exact same SDE or EBITDA and still sell for very different prices, because the multiple reflects risk and quality, not just the size of the earnings number. A business with a diversified customer base, documented systems, and a manager in place who is not the owner will usually justify a higher multiple than one where a single client accounts for 40 percent of revenue and the owner personally handles every sale.

Growth trend matters too. A business with three years of steadily rising revenue typically supports a stronger multiple than one with flat or declining revenue, even if this year's earnings happen to match. Buyers are ultimately purchasing future cash flow, and a rising trend is more reassuring evidence of what that future looks like than a single good year sitting on top of a decline.

Recurring revenue, contracts, and low customer concentration all reduce a buyer's perceived risk, and lower perceived risk is what actually pushes a multiple upward. This is why two businesses with identical earnings, in the same industry, can still land a full point or more apart on their multiple.

What the formula can't tell you

The earnings-times-multiple formula produces an estimate of enterprise value, a general market price for the whole operating business. It does not tell you what you will actually deposit in your bank account, since debt payoff, required working capital left in the business, taxes, and transaction costs like broker and attorney fees all come out of that headline number before you see a check.

The formula also cannot tell you what one specific buyer will actually offer on a specific day. Financing availability, a buyer's strategic interest, and negotiating leverage all move the final price independently of the underlying math. Treat the formula's output as a well-informed starting range to negotiate from, not a guaranteed sale price.