How to value a small business before you make an offer

There is no single correct value for a small business. What exists instead are three recognised approaches: value what it owns, value what it earns, or value it against what similar businesses have actually sold for. A serious buyer runs more than one, because each approach tests a different assumption, and the gap between the answers is usually more informative than any single number. Before you put a figure in an offer, know which question you are actually answering.

Three questions, not one formula

Professional valuers rely on the same three routes almost everywhere, whichever country they work in. The US Internal Revenue Service's own guidelines for valuing a closely held business state plainly that "the three generally accepted valuation approaches are the asset-based approach, the market approach and the income approach" (IRS Business Valuation Guidelines). None of the three is "the" valuation. Each answers a different question, and a careful buyer uses all three to triangulate, rather than picking whichever number best supports the offer they already wanted to make.

Underneath all three sits the same idea, usually called fair market value: what a willing buyer would actually pay and a willing seller would actually accept, with neither forced into the deal. In the UK, where this question is settled for tax purposes rather than left to opinion, the statutory definition is almost disarmingly plain: "the market value of an asset is the price which that asset might reasonably be expected to fetch on a sale in the open market" (HMRC Capital Gains Manual, CG14530). That one sentence rules out a price based on what the seller needs, what you can afford, or what either party hopes is true. It is a tax definition for UK capital gains purposes specifically; tax rules change, so check current HMRC guidance before relying on it for anything you file.

The asset approach: a floor, not an answer

Add up what the business owns: cash, stock, equipment, property, money owed to it. Subtract what it owes. What remains is net tangible assets, sometimes called book value.

On its own, this approach rarely gives the right answer, because it ignores the thing that makes most small businesses worth buying at all: their ability to keep earning. It carries real weight in two situations. First, a business that is barely profitable or losing money, where buyers are effectively pricing the assets rather than the trade. Second, as a floor underneath the other two approaches: a seller is unlikely to accept less than the business would fetch broken up and sold piece by piece, and a buyer should be wary of paying well above what the earnings justify just because the balance sheet looks tidy.

The earnings approach: what the profit will support

For most small, profitable businesses, this is the approach that carries the most weight. It starts with a profit figure and multiplies it.

Work out which profit figure you are actually looking at before doing anything else with it. Small businesses are commonly priced on seller's discretionary earnings, often shortened to SDE, which assumes you will work in the business yourself, or on EBITDA, which assumes a manager is already being paid. Confusing the two inflates or deflates a price without anyone intending it; our guide to reading a business-for-sale listing covers how to tell them apart quickly.

Once you trust the profit figure, the multiple you apply to it is a judgement about how durable that profit looks, not a fact about the business. Recurring income, a team that can run without the owner, and a spread of customers all push a multiple up; dependence on one person or one client pushes it down. What a valuation multiple really means sets out what moves it, and why a low multiple is not automatically a bargain.

The market approach: what similar businesses actually sold for

In public markets this is easy: a quoted share price tells you what is actually trading. Private small businesses have no exchange. Transaction prices are rarely published, and when a broker says a business is "priced in line with the market", they are usually drawing on the deals they have personally seen rather than any published index.

Treat this approach as a sense check rather than a precise method for a private business. Ask a broker, an accountant, or anyone active locally in the sector what similar businesses have changed hands for recently, and treat the answer as a range, not a number. If your own figure from the earnings approach sits well outside that range, find out why before you explain it away.

A worked example

The figures below are illustrations built for this article. They are not a real business, a forecast, or a typical outcome.

The wide gap between the asset figure and the other two is normal. It is the price of the business's ability to keep earning, not a sign that something is wrong. A wide gap between the earnings figure and the market figure deserves an explanation before a number goes into writing: either the profit is unusually strong or weak for the trade, or one of the two figures rests on assumptions that will not survive scrutiny.

Where a lender's own valuation comes in

If you are borrowing part of the price, your own number is not the only one that matters. In the US, the current SBA rulebook for 7(a) loans states that the total debt supporting a change-of-ownership purchase, including any seller finance that is not on full standby, "is limited to the business valuation amount" (SBA, SOP 50 10 8.1, effective 1 October 2026). Above a purchase price of $350,000, that valuation has to come from an accredited, independent source commissioned by the lender, not a valuation prepared for the buyer or the seller. Rules like this change; check the current SOP on sba.gov before relying on any detail of it. UK lenders work on the same logic even without one published figure to point to: ask early what a bank's own underwriting is likely to support, so the number in your offer and the number a lender will fund are not a surprise to each other.

What to do before you put a number in an offer

• Work out your own figure using at least two of the three approaches, not one.
• Test the profit figure itself before you multiply it. A valuation built on unreliable earnings is an opinion wearing a number; our due diligence checklist sets out where to look first.
• Use a professional, and bring your own concerns and your own working to them rather than asking them to start from nothing. You are paying for judgement, not just a spreadsheet.
• If this is your first acquisition, talk the number through with people who have done it before making an offer, not after. That is a large part of what the Republic of Investors community exists for.

Common questions

How many times profit is a small business worth? There is no fixed answer, and a multiple quoted without the detail behind it tells you little. The multiple that applies to a given profit figure reflects how durable that profit looks, not an industry rule of thumb. See what a valuation multiple really means for what moves it up and down.

Should I value a business on SDE or EBITDA? Use whichever figure the seller has actually calculated, but know what it includes before comparing it with anything else. SDE assumes you work in the business; EBITDA assumes a manager is already being paid for that. Treating the two as interchangeable moves the price without anyone noticing.

Do I need a professional valuation before I make an offer? Not for an initial, non-binding offer, which is usually just an opening position. You do need one, or at least a carefully tested number of your own, before you commit to a price, and a lender financing the purchase will insist on its own regardless of what you have done.

Can a business be worth more than its assets and its earnings multiple suggest? Occasionally, to a specific buyer who gains something beyond the standalone business, such as removing a competitor or acquiring a capability they would otherwise have to build themselves. That is a strategic premium, not a valuation, and it is worth naming as such rather than letting it quietly inflate the number you tell yourself the business is worth.

What if my number and the seller's asking price are far apart? A wide gap is information, not necessarily a dead end. Ask the seller what their asking price is actually based on, and be specific about which approach and which profit figure produced yours. "We disagree on the price" is rarely the real disagreement; usually it is two different questions being asked.