How Much Can I Sell My Business For? How Value Is Set

How much can I sell my business for, and who decides?

"How much can I sell my business for" is the first question most owners ask, and the accurate answer is that the market decides, within limits set by the numbers you can document. A price is the point where a qualified buyer, the buyer's lender, and the seller agree. No formula produces that number on its own. A valuation shows the range of outcomes the evidence supports and explains why.

This article explains how that evidence is assembled: the earnings measure buyers start from, what the multiple represents, how buyers and lenders test the figures, where asset value and market comparables fit, and why the price in a letter of intent is rarely the amount that reaches your bank account. It does not tell you what your business is worth. Nobody can do that responsibly without reviewing your records.

Which earnings measure do buyers start from?

Most small and lower middle market businesses are priced from one of two earnings measures.

Seller's discretionary earnings (SDE) is the measure most often used for owner operated businesses. It starts with pretax profit and adds back the owner's salary and benefits, interest, depreciation, amortization, and expenses that are personal or nonrecurring. The result shows the total cash benefit available to one full time owner operator. Our guide to seller's discretionary earnings walks through the calculation with an illustrative example.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is typically used once a business has management in place and the owner's role could be filled by a hired manager. EBITDA treats owner compensation as an operating expense at a market rate, so for the same business it is a smaller figure than SDE.

The two measures are not interchangeable. Applying a multiple meant for EBITDA to an SDE figure, or the reverse, distorts the result. A buyer will recast your numbers into whichever measure fits the business, so it is better to do that work yourself first and know where the figures land.

What does the multiple actually represent?

The multiple is shorthand for risk and transferability. A buyer is paying for a stream of future earnings, and the multiple expresses how confident that buyer is that the stream will continue under new ownership.

Factors that tend to support a stronger multiple include:

• Earnings that are stable or growing across several years, rather than one strong year
• Revenue spread across many customers, with no single account carrying the business
• Recurring or contracted revenue
• A team that runs daily operations without the owner present
• Clean, consistent books that reconcile to tax returns
• Leases, licenses, contracts, and supplier relationships that can transfer to a buyer

Factors that tend to pull a multiple down are the mirror image: owner dependence, customer concentration, declining or erratic earnings, deferred maintenance, a lease near its end, and records that do not reconcile.

Published multiples circulate widely, and owners often anchor on a figure they heard from a peer or read online. Those figures describe other businesses, in other years, under other deal terms. They are not a reliable shortcut for your company, which is why we do not quote them.

How do buyers and lenders test the numbers?

A buyer's first look is at your recast financial statements. The serious review comes later, in due diligence, and it is designed to confirm that the earnings you presented are real and likely to continue.

Expect a buyer or the buyer's accountant to:

1. 01Reconcile your profit and loss statements to your filed tax returns
2. 02Match reported revenue to bank deposits
3. 03Question each add back and ask for supporting documents
4. 04Review customer lists, contracts, and revenue by customer
5. 05Review payroll, key employee arrangements, and any family members on payroll
6. 06Check receivables aging, inventory counts, and work in progress

When the buyer uses SBA financing, the lender runs a parallel review. The lender's central question is whether documented historical cash flow covers the new debt payments with room to spare. An add back the lender cannot verify is often excluded from that calculation, which can reduce the loan the lender will approve and, in turn, the price the buyer can pay. Our overview of SBA 7(a) loans for buying a business covers how lenders underwrite an acquisition.

The practical point is that the price a buyer offers is bounded by what can be financed and verified, not by what the owner believes the earnings to be.

Where do asset value and market comparables fit?

Earnings drive most valuations of profitable operating businesses, but two other approaches inform the range.

Asset value looks at what the tangible assets are worth: equipment, vehicles, inventory, and real estate if it is included. For a business with modest earnings, asset value can act as a floor. For a business with strong earnings, equipment and inventory are usually part of the price derived from earnings rather than an addition to it. Whether inventory is included in the price or paid for separately at closing is a negotiated term, and the letter of intent should state it clearly.

Market comparables draw on data from completed sales of similar businesses. Transaction databases used by brokers and appraisers record reported sale prices against reported earnings and revenue. This data is useful context, but it has limits. Reported deals vary in structure, the underlying financials are not audited, and small sample sizes in a given industry and region can produce wide ranges.

A credible opinion of value considers all three approaches and explains which one carries the most weight for your business and why.

Why does deal structure change the number?

Two offers with the same headline price can be very different offers. Structure determines how much you receive at closing, how much you receive later, and how much depends on future performance.

Cash at close is the portion paid at closing from the buyer's equity and loan proceeds. It is the most certain part of the price.

Seller financing is a note the seller carries, repaid by the buyer over time with interest. Lenders often expect some seller financing because it keeps the seller invested in a successful transition. It also carries risk. If the business struggles after the sale, payments on the note can be delayed or reduced, and on an SBA financed deal the note is subordinate to the bank's loan.

Earnouts tie part of the price to performance after closing, such as revenue or gross profit targets over a defined period. An earnout can bridge a gap when buyer and seller disagree about future results, but the seller no longer controls the business that has to hit the targets. The definitions in the earnout language matter as much as the targets themselves.

Other terms affect the outcome as well: whether the deal is an asset sale or a stock sale, how working capital is handled, the length and pay of any transition period, and the scope of a noncompete.

Why is the headline price different from what you receive?

The price in the purchase agreement is a gross figure. Several items come out of it before the seller's net proceeds are known.

• Debt payoff. Most small business sales close on a cash free, debt free basis. Business loans, equipment loans, and lines of credit are generally paid off from proceeds at closing.
• Fees. Broker commissions, legal and accounting fees, and any lease assignment or franchise transfer fees come from proceeds or are paid by the seller directly.
• Taxes. How the purchase price is allocated among asset classes affects how the seller is taxed. Some portions may receive capital gains treatment and others may be taxed as ordinary income. Allocation is negotiated with the buyer and reported to the IRS, so review it with your CPA before you sign a letter of intent.
• Deferred amounts. Seller notes and earnouts are paid later, if at all, and should be planned for that way.

An owner who plans around the headline price and ignores these items can be surprised at closing. A useful exercise before going to market is to estimate net proceeds under a few different structures with your CPA.

What is a broker opinion of value, and how is it different from an appraisal?

A broker opinion of value is an estimate of the price range a business could reasonably achieve in the current market, prepared by a broker using your financials, market data, and knowledge of how buyers and lenders behave. It is a practical tool for deciding whether and when to sell and for setting an asking price.

A broker opinion of value is not a certified appraisal. A certified appraisal is prepared by a credentialed appraiser under recognized professional standards, and it is the appropriate document for estate and gift tax filings, divorce, partner buyouts, litigation, and some lender requirements. If you need a valuation for one of those purposes, engage a qualified appraiser.

Forge's business valuation service provides a broker opinion of value for owners considering a sale. It recasts your financials, identifies the add backs a buyer and lender are likely to accept, and explains the factors pushing value up or down.

How should you prepare before asking the question?

The most useful preparation is the same work a buyer will do. Gather three years of profit and loss statements, balance sheets, and tax returns, plus the current year to date. List each add back with its supporting documentation. Note which customers, employees, and contracts are critical, and whether each would transfer to a new owner.

Then address what you can before going to market. Reduce owner dependence by delegating key relationships. Separate personal expenses from business accounts. Renew or extend a lease that is close to expiring. Each of these changes the risk a buyer sees when reviewing the business.

When you are ready to see the full process, our guide to selling your business covers preparation, marketing, buyer qualification, and closing.