How to value my business when looking to sell
Taylor Wallace
March 15, 2023 ⋅ 11 min read
This article was originally written in March 2023 and has since been updated with new discoveries and research in 2025.
You have put time, money, and grit into your company. When you decide it is time to exit, knowing how to value a business is the difference between an offer that feels right and one that leaves money on the table. This guide walks you through how buyers think, which valuation method fits your situation, and what to improve before you go to market.
You might be asking a simple question: How do I value my business in a way that stands up to scrutiny? The answer is not a guess. It is a narrative backed by numbers that signals real business worth to the people writing the checks.
What Is a Business Valuation?
Before you pick a price, align on the idea. A business valuation determines a company’s economic worth based on its ability to produce profits, the value of its assets, and what comparable companies have sold for.
Owners use valuations to prepare for a sale, raise capital, plan succession, or make strategic decisions about growth. The goal is to align your expectations with what prospective buyers are willing to pay in the current market.
Even if you are not selling tomorrow, understanding valuation helps you improve the business’s future positioning. When you see how cash flows, tangible assets, and intangibles work together, you can prioritize projects that increase enterprise value, not just revenue.
Key Components of a Business Valuation
Each part of the process points buyers toward a confident offer. Start by seeing how buyers convert messy reality into a number they can justify, then use that lens to reduce perceived risk and increase the earnings multiple you can command.
Read these as the levers you can tighten before you go to market:
Profit generation: In small business sales, buyers often evaluate Seller’s Discretionary Earnings (SDE), which starts with net income and adds back owner salary and non-recurring expenses. Larger businesses tend to emphasize EBITDA, short for earnings before interest, taxes, depreciation, and amortization. Free cash flow reflects money left after necessary reinvestment, and it supports present value models of future cash flows.
Value of assets: Tangible assets include equipment, inventory, and property. Intangible assets include brand, customer lists, software, intellectual property, and goodwill. Asset valuation and net assets matter more when profits are volatile or the business is asset-heavy.
Market conditions: Current market value reflects what similar businesses sell for today. Multiples shift with supply and demand, industry standards, and financing conditions.
Buyer perception of risk: Lower risk, easier transfer, and clear systems support higher earnings multiples, because potential buyers believe the business will keep generating future profits without drama.
Together, these inputs set the range you can credibly defend. Tighten one or two, and the entire picture improves, which is why the next step is choosing a valuation method that best captures your trajectory and buyer fit.
Common Valuation Methods
No single approach fits every company. The right valuation method depends on the stability of earnings, asset intensity, and available market data. Many rules of thumb are business-based rather than academic, so most owners triangulate, then select the approach that best reflects the company’s trajectory and the buyers they expect.
Income Value Approaches
Income approaches convert expected cash flows into a single number. The simplest method capitalizes a representative year’s earnings using a capitalization rate.
For growing firms, a discounted cash flow (DCF) model projects several years of future cash flows and discounts them at a rate that reflects risk. Think of the discount rate as the anticipated rate of return a buyer requires for this deal compared with other opportunities. You can dive deeper into how discount rates work with this clear primer on the discount rate from a professional finance training resource.
For small businesses, SDE often anchors the analysis because it reflects the earnings available to an owner or operator. Larger businesses, especially with professional management, are more often evaluated using EBITDA, which better normalizes across different tax and financing structures.
For instance, if your SDE is $400,000 and the appropriate cap rate implies a 3.0 multiple, the value of your business might be around $1.2 million using the simplest method. If you are growing quickly with strong visibility into future cash flows, a DCF could justify more, since it captures the business’s future, not just a single year.
Market Value Approaches
Market approaches compare your business to comparable companies that have sold recently. Buyers look at price-to-earnings measures like the P/E ratio, the times revenue method, and an industry-specific multiplier range. When the data set is large and accurate, a revenue method can be persuasive because it pairs top-line momentum with buyer demand.
Two coffee shops with similar annual earnings can sell for different numbers. One may have a manager in place and a broad customer base, while the other may be owner-run with customer concentration.
The first typically commands a higher multiple because the risk is lower risk. Baton’s data advantage is a large, verified comp set that distinguishes surface similarities from operational realities, which leads to a more comprehensive view.
Factors Buyers Consider When Valuing a Business
This section turns the spotlight toward what drives the price up or down once the spreadsheet math is done.
Use it as a checklist to reduce friction for prospective buyers:
Ease of operation without the owner: The less owner-dependent the company, the more buyers you attract and the higher the multiple. If the owner is the rainmaker, key person risk pushes value down.
Customer concentration: A single customer over 20 to 30 percent of revenue increases risk, which can lower the multiple or force earnouts.
Growth potential: Clear, believable growth levers matter, for example, adding locations, launching a subscription, or expanding into adjacent services.
Competitive advantages: Differentiation through brand, technology, or exclusive supply can sustain pricing power.
Operational systems: Documented processes, clean financial statements, and reliable reporting reduce diligence friction and support a higher offer.
A real-world pattern illustrates this: One fast-growing company we evaluated at 3.2x using comparable sales justified 4.5x on a DCF, because systems and repeatable customer acquisition suggested stronger future profits. Present value of those cash flows, not just today’s revenue, swayed the final price.
Tangible vs. Intangible Assets
Financial buyers look beyond the profit line. They want to know what is backing those profits and how hard it would be to replace the engine.
They examine:
Tangible assets: Equipment, vehicles, inventory, and real estate. Replacement value and book value are reference points, though not always equal to market value.
Intangible assets: Brand equity, software, patents, proprietary data, customer contracts, and trained teams. In high-tech or service businesses, intangible assets can outweigh tangible assets in value.
When profits are inconsistent, asset value can set a floor. When intangibles drive moat and margins, they can pull the valuation above simple asset totals.
Business Value Based on Profits and Owner’s Salary
For small companies, SDE neatly ties to what an owner can take home. It starts with net income, adds back owner compensation, and includes add-backs for one-time items and non-operating costs. A quick note on terminology: You will sometimes see the shorthand "interest, taxes, and depreciation" in explanations of normalized earnings. Lenders and buyers generally look at EBITDA, which adds amortization, so the comparison is apples to apples.
A quick add-back example: If net income is $150,000, owner salary is $120,000, and you had $15,000 of one-time relocation costs, SDE becomes $285,000. Apply an earnings multiple, say 3.2x, and you get approximately $912,000 as an initial market value signal. For larger businesses with managers in place, EBITDA often replaces SDE to normalize across capital structures.
The Role of Industry Trends
Multiples are not set in stone. They adapt to industry trends and buyer preferences. Veterinary clinics with recurring wellness plans have been trading at higher multiples than many discretionary travel agencies, because cash flow visibility tends to be stronger.
A restaurant with robust delivery channels may earn a higher multiple than one relying on seasonal foot traffic. Industry standards help you select the right benchmark, but current market dynamics determine how aggressive you can be.
If your model is resilient and growth is credible, market comps will support a stronger case. If the market is thin, the income approach and a careful look at net assets can do more of the heavy lifting.
The Importance of Recent Financial Performance
Buyers weigh the last twelve months heavily, often referred to as the trailing twelve months, or TTM. If the most recent period shows acceleration, you can argue for a higher multiple or use a forward earnings figure.
If there is a dip, be ready with a clear explanation and evidence of recovery. Consistent growth over several years earnings builds confidence, which often improves price outcomes.
How Different Types of Buyers Evaluate Your Business
The same coffee shop looks different to different buyers.
Keep these lenses in mind when you craft your narrative:
Owner or operator: Values SDE and lifestyle fit, prefers businesses that are simple to run, typically restaurants and local services, often relies on an industry-specific multiplier and bank financing.
Passive investor: Focuses on management in place, lower risk, and a clean handoff, looks at EBITDA and free cash flow coverage.
Private equity or strategic buyer: Emphasizes scale, add-on synergies, and systems, often pays a premium for larger businesses with professional processes.
The practical move is to decide which buyer type you want to attract, then tune your materials to match. Lead with SDE and simplicity for an owner or operator, highlight stable processes and a capable manager for a passive investor, and foreground scalable systems and ample opportunities for private equity or strategic buyers. Aligning the story to the right audience reduces diligence friction, expands your pool of serious bidders, and can increase the multiples you achieve.
Valuing a Business at Different Growth Stages
Your position on the operational maturity curve affects both the multiple and the buyer pool.
Take a look:
Owner-dependent startup stage: Founder is critical to sales and delivery, key person risk is high, and multiples are constrained.
Semi-autonomous stage with manager potential: Documented processes and a capable second-in-command reduce risk, multiples improve.
Fully autonomous growth stage: The company runs smoothly without the owner, scalability is clear, private equity and strategic buyers are more likely, and multiples increase.
How Baton Calculates Your Business Value
Serious buyers will test your number from multiple angles, so your valuation should meet them there. Baton combines income methods, market comps, and asset analysis to highlight what drives the estimate.
You get a clear rationale, a range rather than a single point, and practical steps to increase the value of a business before you list. When data supports both growth potential and current market value, you negotiate from strength.
When to Use a Professional Valuation Expert
There are situations where a third-party opinion is worth it. An unbiased assessment adds credibility with lenders and buyers, especially when numbers are complex, when shareholder alignment is sensitive, or when a dispute is possible. A professional helps you avoid underpricing in hot markets and overpricing when comps do not support your goal.
Preparing to Sell Your Business
Momentum matters. A little preparation before you go to market can lift your outcome.
Here’s what to do:
Get financials organized, accurate, and timely, including three years of clean financial statements and a simple monthly reporting cadence.
Identify and reduce risks, such as customer concentration or key person risk, and address what you can reasonably fix.
Enhance operational efficiency through written SOPs, a basic KPI dashboard, and reliable vendor contracts.
Strengthen brand and customer relationships, implement effective document retention programs, and develop referral systems.
Sanity check your price. Read business price vs business value to understand how list price and actual value interact, then calculate the selling price of business scenarios to decide your go-to-market plan.
These steps are intentionally business-based rather than academic. They remove uncertainty so potential buyers can move faster and pay for confidence.
Your Next Step to a Confident Exit
Valuation is not guesswork or a gut feel. It is a structured way to translate future cash flows, assets, and industry standards into a fair price today. Start by choosing the methods that fit your size and growth profile.
Use comps to ground the current market, income methods to capture momentum, and an asset check that considers book value and net assets to set the floor. Then reduce owner dependence, clarify systems, and tell a clean story.
When you are ready, get your estimate with Baton’s business valuation calculator, then decide whether you want to test the market now or keep building toward a higher number.