How to Calculate the Selling Price of a Small Business

Selling your small business is a major decision—one that demands more than a best guess when it comes to setting the price. Getting it right is critical. 

Price too high, and you risk scaring off potential buyers. Set it too low, and you could leave significant value on the table, leading to financial losses that can impact your next chapter. 

That’s why understanding how to calculate the selling price of a small business is so important.

Too often, business owners rely on emotion or rough estimates when determining value. But with the right business valuation methods, you can anchor your asking price in facts, not feelings. 

Baton Market helps sellers skip the guesswork by offering accurate business valuations using several business valuation methods—saving time and protecting the value of your hard work. This guide walks you through how to calculate the selling price of a small business step-by-step.

Start With Cash Flow: Understanding Seller’s Discretionary Earnings (SDE)

When valuing an existing business, it starts with understanding what the company generates for its owner. Seller’s Discretionary Earnings (SDE) represents the total financial value that a single owner would get from owning a business on an annual basis. 

The formula is straightforward: SDE = Pre-Tax Earnings + Owner’s Salary + Perks + Non-Cash Expenses + One-Time Expenses – Non-Operating Expenses

For example, imagine a business with $150,000 in pre-tax earnings. The owner draws a $75,000 salary and has $10,000 in one-time relocation costs. 

Add back non-cash depreciation of $5,000. That gives you $150,000 + $75,000 + $10,000 + $5,000 = $240,000 in SDE.

SDE provides buyers with a clearer understanding of key metrics and may benefit from exploring SDE vs. EBITDA for a deeper financial analysis, a picture of a business’s cash flow, and an overview of its financial health. 

It forms the foundation for applying the income approach to valuation. The income approach to business valuation determines the amount of future income a business can reasonably expect to generate. Buyers also assess the revenue and earnings growth as indicators of sustainability and reduced financial risk.

Multiply It: How Business Valuation Uses Earnings Multiples

Once SDE is calculated and reflects the company’s earnings and net income, many valuations apply a business multiple to determine price. 

This multiple reflects factors like market conditions, the specific business’s industry, size, brand recognition, desired profit margin, and risk profile. Established businesses in stable markets might command a higher multiple than a niche operation with heavy owner involvement.

Let’s say your business has an SDE of $240,000, representing annual net profit and how you generate revenue of $240,000.

If similar companies are selling at a 2.5x multiple, your estimated value is $600,000. This earnings method aligns price with what other businesses are fetching and accounts for market value expectations. The capitalization of earnings method calculates a business's future profitability based on its cash flow and expected value, supporting this approach.

Factor in Asset Value and Liabilities

Valuation isn’t only about earnings. It’s also about business assets that contribute to overall business value. 

Many buyers also consider both tangible assets (such as equipment or inventory) and intangible assets (like intellectual property or goodwill). The adjusted net asset method calculates the difference between a business’s assets and its liabilities at fair market values. These can add to the business’s monetary value—especially if physical assets are well-maintained or brand recognition is strong.

Liabilities reduce value, so organized financial records and a clear financial overview are essential for accurate business valuation and negotiation. Professional appraisals, often costing several thousand to tens of thousands of dollars, can provide an objective valuation method that helps mitigate emotional bias.

Validate With Comparables and Market Dynamics

An objective valuation method combines internal numbers with external reality. Comparable companies and other recently sold businesses offer vital benchmarks. 

Analyzing competitors' pricing can provide valid benchmarks for the selling price. What did similar business sales close for? How are market trends, industry standards, interest rates, current market insights, and the state of the economy impacting demand?

Market insights from comparable companies also reflect business size and opportunities for a higher price depending on these dynamics.

Potential buyers focus on a business’s future earnings and market share when evaluating offers. Professional business appraisers use various methods to determine a business’s selling price, ensuring a comprehensive assessment.

Estimate the Business’s Worth Based on Valuation Methods

Smart sellers don’t rely solely on one method and can benefit from resources like learning how to value a small business. They often use accounting software to compile historical data or support valuation calculations when assessing worth.

Combining the income approach, market approach, asset-based approach, and discounted cash flow analysis—which determines the present value of a business’s future cash flow—gives a clearer, more defensible price range. What matters is showing potential buyers a credible range backed by data like historical data, annual sales, and present value calculations.

Regular business valuations enable owners to understand the value of their business, maximize its worth, and make informed decisions. Targeting buyer motivations and preferences can further enhance selling price strategies.

Avoid These Common Mistakes Business Owners Make

It’s easy to overestimate intangible value or price based on emotion. Sellers sometimes set final price expectations based on internal costs or sunk investments, rather than what the market will bear. Skipping comparables, failing to account for liabilities, or not preparing organized financial records can result in lost offers or a delayed sale. 

Business owners require a range of documentation to facilitate a smooth valuation process, and well-organized financial records enable smoother ownership transfers. Using a selling a business checklist can help you stay organized and avoid these pitfalls. 

When to Bring in a Valuation Expert

While DIY calculations offer a starting point, engaging a professional financial advisor or using a free tool like Baton’s business valuation calculator ensures proper valuation. 

Hiring a professional appraiser can provide an objective valuation of a business for sale or investment. An outside perspective highlights market dynamics that you might overlook and helps refine pricing to attract potential buyers without leaving money on the table.

Set the Right Price With Confidence

Selling your small business is too important to leave to guesswork. Now’s the time to take action to value your business using a business-based approach that reflects a worthwhile sales price.

By using a mix of business valuation methods—including income, asset, market approaches, and discounted cash flow—you can set the right price that reflects your business’s true worth. 

Know your business’s value before you list, and move forward with confidence.

Get your free valuation today and see how we can help you sell smarter.