What valuation methods does the calculator use?
4. What valuation methods does the calculator use?
The calculator uses five industry-standard valuation methodologies — the same methods professional business brokers, M&A advisors, and certified valuation analysts use when pricing a business for sale. You do not need to choose a method or understand the math behind each one. The calculator automatically selects and applies the most appropriate method based on your business type, industry, and the financial information you provide.
Here is a plain-English breakdown of each method and when it applies:
Method 1 — SDE (Seller’s Discretionary Earnings)
Most common for small businesses with annual revenue under $5 million
SDE is the most widely used valuation method for small, owner-operated businesses. It measures the total financial benefit the owner receives from the business — including salary, net profit, and any personal expenses run through the business. The idea is simple: a buyer wants to know how much money they would make if they stepped into your shoes and ran the business themselves.
How it works:
Your SDE is multiplied by an industry-specific number called a multiplier to arrive at your estimated business value.
Example:
- Annual SDE: $250,000
- Industry multiplier: 2.5x
- Estimated business value: $625,000
SDE is particularly relevant for businesses where the owner is actively involved in day-to-day operations — restaurants, retail stores, service businesses, and trades.
Method 2 — EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
Standard for mid-market businesses with $1 million or more in annual earnings
EBITDA measures your business’s core operating profitability by stripping out non-cash expenses and financing costs. It gives buyers and investors a cleaner picture of how much cash the business actually generates from operations — independent of how it is financed or structured for tax purposes.
How it works:
Like SDE, your EBITDA is multiplied by an industry multiplier. Mid-market businesses typically command higher multipliers than small businesses because they are less dependent on a single owner and have more sophisticated operations.
Example:
- Annual EBITDA: $800,000
- Industry multiplier: 4.5x
- Estimated business value: $3,600,000
EBITDA is the standard valuation basis for manufacturing companies, distribution businesses, professional service firms, and any business with multiple employees and management layers.
Method 3 — Capitalization of Earnings
Used for stable businesses with consistent, predictable earnings
This method determines business value by dividing your normalized annual earnings by a capitalization rate — essentially asking the question: what is a steady stream of this income worth to an investor today? The capitalization rate reflects the risk level of the business and the expected return a buyer would require.
How it works:
- Lower risk businesses have lower cap rates — and therefore higher valuations
- Higher risk businesses have higher cap rates — and therefore lower valuations
Example:
- Normalized annual earnings: $300,000
- Capitalization rate: 25%
- Estimated business value: $1,200,000
This method works best for businesses with stable, recurring revenue and predictable profit margins — think established professional practices, long-term service contracts, or businesses in mature industries with little volatility.
Method 4 — Times Revenue
Used in industries where revenue is the primary value driver
Some industries are valued primarily on revenue rather than earnings — particularly when profit margins vary widely across businesses in the same sector, or when a buyer is acquiring the customer base and revenue stream rather than the profitability. In these cases a multiplier is applied directly to annual revenue rather than earnings.
How it works:
Your annual revenue is multiplied by an industry-specific revenue multiple.
Example:
- Annual revenue: $1,500,000
- Revenue multiplier: 0.75x
- Estimated business value: $1,125,000
Times Revenue is commonly used for technology companies, SaaS businesses, media and content companies, insurance agencies, and certain professional service firms where intangible value — brand, customer relationships, recurring contracts — is the primary driver of worth.
Method 5 — DCF (Discounted Cash Flow)
Used for businesses with strong growth trajectories or project-based revenue
DCF is the most sophisticated of the five methods. Rather than looking at what your business earns today, it projects your future cash flows over a set period — typically five to ten years — and then discounts those future earnings back to what they are worth in today’s dollars. The discount rate accounts for the time value of money and the risk that those future earnings may not materialize as projected.
How it works:
- Future annual cash flows are projected based on current performance and growth trends
- Each year’s projected cash flow is discounted back to present value using a discount rate
- The sum of all discounted future cash flows equals the estimated business value
Example:
- Projected cash flows over 5 years: $200K, $230K, $265K, $305K, $350K
- Discount rate: 20%
- Present value of those cash flows: approximately $750,000
DCF is particularly useful for fast-growing businesses, startups with strong revenue momentum, or businesses with long-term contracts and predictable future income. It rewards growth — a business on a strong upward trajectory will often receive a higher DCF valuation than its current earnings alone would suggest.
Which method will be used for my business?
The calculator evaluates your inputs and automatically applies the method — or combination of methods — that best fits your business profile. In many cases it will calculate your valuation using multiple methods and present a blended range so you can see how different approaches affect your number. This gives you a more complete and realistic picture than any single method alone.
Why does the method matter?
Understanding which method applies to your business helps you have more informed conversations with brokers, buyers, and advisors. When someone makes you an offer or presents a valuation, knowing the methodology behind the number tells you whether it is reasonable — and gives you the foundation to negotiate confidently.
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