How to Accurately Evaluate Your Small Business Worth Before You Sell
Do you own one of the more than 36 million small businesses in the United States? If you’re preparing to sell your business and move on to your next adventure, you’ll need to accurately assess its value before you list it. Otherwise, you run the risk of leaving money on the table or delaying a sale by overpricing your company.
How do you properly value your business? Here are some common valuation methods, as well as tips for pricing your business appropriately with the support of experienced professionals.
Why a Proper Valuation Strengthens Your Negotiation Power
When you sell your business, buyers scrutinize everything during the due diligence period. They will take a deep dive into your cash flow and financial records to determine whether the company is a good fit for their portfolio. If you don’t have a credible valuation to support your asking price, negotiations can quickly shift in the buyer’s favor.
Starting the selling process with a proper valuation positions you for success. A well-supported valuation:
- Establishes realistic expectations for both sides
- Reduces back-and-forth during due diligence
- Positions you as a prepared, serious seller
- Helps justify your price with data, not emotion
Business brokers play a key role here. They can translate your complex financial records into a clear, defensible value that resonates with qualified buyers. The right brokerage will also protect your interests throughout the sale.
Common Small Business Valuation Methods
There is more than one way to value your business. When choosing a method, you should consider the size of the company, what industry you operate in, and your financial structure. Here are the most common approaches:
Seller’s Discretionary Earnings (SDE)
SDE is the most common valuation method for small, owner-operated businesses. It looks at the total financial benefit you receive, including:
- Net profit
- Owner’s salary
- Salary
- Certain discretionary expenses
The seller’s discretionary earnings approach is especially useful when you are heavily involved in the business’s day-to-day operations. You will need to apply an SDE multiple, which is based on factors like risk, industry, and growth.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
EBITDA is more commonly used for larger or more established companies. It focuses on operational profitability without factoring in financing or accounting choices. This method is often preferred by institutional or strategic buyers and is common when selling mid-sized businesses without management teams in place.
EBITDA will likely be the wrong valuation model for your small business. It is too complex and may not accurately reflect the value of your company.
Asset-Based Valuation
An asset-based approach looks at what your company owns and subtracts what it owes. You may want to use this method if your business:
- Owns a lot of assets
- Has an inconsistent cash flow
- Is being liquidated
While asset-based valuation is straightforward, it may not account for your brand equity or future earning potential.
DIY Valuation vs. Professional Business Broker Valuation
Some owners attempt to value their business on their own. Others rely on professionals. There are pros and cons to each route.
A DIY valuation might be:
- Fast
- Useful for early planning
- Helpful when you want a rough estimate
But the drawbacks of a DIY valuation can’t be ignored:
- You can easily overlook risk factors
- Your multiples may be unrealistic
- DIY lacks credibility with serious buyers
Advantages of a professional valuation include:
- Better credibility
- More realistic projections
- Accurate pricing
- Stronger positioning
If you want to avoid the pitfalls of DIY valuation but are still in the early planning phases of selling your business, a professional valuation calculator offers a great third option. This free tool gives you a strong estimate using a realistic multiple, so you have the insights necessary to jumpstart the selling process.
Why Sunbelt Business Brokers Is the Smart Choice
Sunbelt Business Brokers serves small to mid-sized business owners by providing expertise, support, and market insights. Let Sunbelt help you sell your business. Book a free consultation today.