How to Value a Company

This article was originally written in September 2025 and has since been updated with new discoveries and research in January 2026.

If you have ever searched how to valuate a company, you have probably noticed two things right away: There is no single “correct” number, and everyone seems to have a different shortcut. That is normal in private markets, where valuation is less about a formula and more about building a range that buyers and lenders can actually support.

This guide walks through the most practical business valuation approaches, shows you how multiples and deal terms work in the real world, and helps you turn your financials into a defensible range you can use to sell (or at least plan your next move).

Why Valuation Matters Before You List

Before you pick a number, it helps to define what “fair” means in a private sale. In most small-business deals, fair market value is not what you feel the business is worth. It is what a qualified buyer can justify based on risk, cash flow, and financing.

Overpricing and underpricing both create predictable problems. Overpricing usually means fewer serious conversations, a longer time on market, and eventually price cuts that raise buyer skepticism. 

Underpricing can move fast, but it often leaves value on the table, especially if you give up leverage on deal structure like working capital targets or seller financing explained terms. A practical goal is a tight, realistic range, not a single heroic number, because range is what holds up when diligence starts.

The point of valuation is not to “win” a debate; it is to set a number that can survive underwriting and still feel like progress when you get to the closing table.

The 3 Most Used Valuation Methods (Explained Simply)

There are dozens of valuation methods, but most small-business outcomes cluster around three frameworks. Think of them as different lenses on the same reality: What the business throws off in cash, what it owns, and what the market is currently paying for similar risk.

The best practice is to pick one primary method that fits your model, then cross-check with a second method so you are not relying on a single story. That cross-check is how you build confidence in your company's worth range.

SDE Multiples (Owner-Operator Lens)

SDE, or Seller’s Discretionary Earnings, is the metric most owner-operator buyers and Main Street lenders care about. It is the cash flow available to a single full-time owner, after you “normalize” the P&L and add back expenses that would not continue under new ownership. This is where add-backs and normalized financials matter.

Common SDE add-backs include owner compensation above market, one-time legal fees, certain personal expenses run through the business, and non-recurring projects. The key is credibility. If an add-back is not documented, it is not really an add-back. Buyers accept add-backs that are repeatable and provable, and they push back hard on anything that looks like wishful thinking.

A simple example: A service business shows $220K in net income, the owner pays themselves $120K, and there are $40K of one-time relocation and legal costs. A buyer may view SDE as roughly $380K (net income + owner comp + supported one-time costs), then apply an SDE multiple that reflects risk, stability, and buyer demand. Your number moves less based on the math and more based on what the buyer believes will stay true after you leave.

If you are selling to a buyer who plans to run the company, SDE is often the most “real” language of value, because it maps directly to lifestyle and debt service.

EBITDA Multiples and Cash Flow Valuation

As businesses grow and professionalize, valuation often “graduates” from SDE to EBITDA. EBITDA strips out financing and certain accounting variables, allowing buyers to compare operating performance across companies. 

That is why you will hear discussions of EBITDA multiples more often in larger deals, and occasionally you will see an EBITA multiple reference as a shorthand (the important thing is to agree on the exact earnings definition being used).

Private-market EBITDA ranges vary widely by sector, growth, and concentration risk. The faster and more defensible your growth, the more buyers can justify paying for future cash flows. The shakier your customer base or the more the business depends on you personally, the more buyers discount the earnings, even if EBITDA looks strong on paper.

This is also where market cross-checks matter. Buyers will compare your results to comparable company analysis and precedent transactions to sanity-check whether your assumptions align with what similar companies have actually sold for. If you want to go deeper on a specific screening shortcut, Baton’s guide on revenue-based valuation is a useful companion for understanding when revenue multiples help and when they mislead.

EBITDA valuation is not “better” than SDE. It is just a better fit when the business is less tied to one owner, and the buyer is underwriting operating performance at scale.

Asset-Based Valuation

Asset-based valuation looks at what the company owns and what it owes, rather than what it earns. This can show up as book value, adjusted asset value, or liquidation value. In plain terms, it answers: If the business stopped tomorrow, what would be left?

This method fits best for asset-heavy businesses (certain manufacturing, equipment-intensive operations, or companies with meaningful inventory) and for distressed situations where cash flow is unstable. It can also be a useful guardrail when earnings are temporarily depressed.

The limitation is that asset value often misses the real economic engine of the business: customer relationships, brand trust, and process maturity. That is why even asset-focused buyers will still sanity-check value against earnings, especially when financing is involved.

Asset-based valuation is a helpful floor, but for most healthy businesses, earnings still set the ceiling that buyers are willing to pay.

Which Method Fits Your Business Model

If valuation feels abstract, anchor it to the way your business actually operates. Different models create different kinds of risk, and buyers price risk more consistently than they price stories.

Below are three simplified examples that show how the same “valuation toolkit” can land differently depending on the cash flow type and scalability.

Service firm with $300K SDE example: A $300K SDE services business may be valued primarily on an SDE multiple, because the buyer is often an owner-operator, and lender financing depends on clear cash flow coverage. Documentation, customer concentration, and owner replacement cost will move the multiple more than revenue growth headlines.

B2B software company with $1.5M EBITDA example: A software company at $1.5M EBITDA often gets evaluated through an EBITDA lens, especially if it has strong recurring revenue and measurable retention. In that context, churn trends, pipeline quality, and product defensibility can matter as much as current margins.

Where a lightweight DCF helps, and where it does not: A discounted cash flow model can be a useful cross-check when you have stable drivers and credible forecasts. It is less useful when the business is highly cyclical, heavily owner-dependent, or lacks clean historical data. The DCF is only as good as the assumptions behind it, and small-business assumptions are often where deals get fragile.

The “right” method is the one that best matches how a buyer will underwrite your reality, not the one that produces the highest number.

Small Business Reality, SDE vs EBITDA

Most sellers do not need more jargon; they need cleaner translation. SDE tells the story of owner economics. EBITDA tells the story of operating performance independent of one owner’s personal situation.

This is where deals often get won or lost: buyers accept add-backs that are real and repeatable, and they reject add-backs that are vague, personal, or unsupported. “I work a lot” is not an add-back. A documented one-time expense with invoices and a clear explanation can be.

Lenders add another constraint. Even when a buyer loves the business, the financing must pencil. 

Banks will pressure-test cash flow, discount aggressive adjustments, and evaluate how dependent results are on you personally. If you are trying to value a business for sale, clean books and conservative add-backs usually tighten the range and speed up the deal more than a bigger headline number would.

The most seller-friendly valuation is the one that a buyer, a lender, and an advisor can all agree is reasonable within the same range.

What Actually Moves Multiples

Multiples are not random. They are a pricing shortcut for risk, and risk shows up in a handful of repeatable ways. If you want to understand how business brokers determine sell price, focus less on the multiple itself and more on what would make a buyer feel safer paying it.

The biggest multiple movers tend to look like this:

• Documentation quality and diligence-ready financial statements

• Owner dependence (and whether someone else can run day-to-day)

• Customer concentration risk (and how quickly revenue would drop if one account left)

• Recurring revenue strength, renewal patterns, and churn trends

• Growth that is supported by pipeline data, not just optimism

If you are wondering how to evaluate a company the way serious buyers do, ask a simple question: “What would break if I stepped away for 90 days?” The more confident the answer, the more leverage you typically have in valuation and terms.

Multiples move when the business feels less fragile, not when the pitch deck feels more polished.

Working Capital, Debt, and Deal Adjustments

Even strong valuations get misunderstood because sellers confuse the headline number with “money to seller.” This is where enterprise value and equity value matter.

Enterprise value is the value of the operating business before cash, debt, and debt-like items are applied. Equity value is what remains to the owner after those adjustments. Working capital is often part of that bridge. Buyers typically expect a “normalized” level of working capital to be delivered at close so the business can operate normally on day one.

In practice, deal math often includes:

• A normalized working capital peg (based on historical averages)

• Cash kept or transferred (depending on the deal)

• Debt and debt-like items paid off or assumed

• Inventory treatment (especially in product businesses)

A clean valuation explains these mechanics early, because surprises here can turn a good offer into a frustrating negotiation.

The more clearly you reconcile enterprise value to equity value, the fewer last-minute resets you will face.

Forecasts Without Guesswork

Forecasting is where sellers accidentally lose credibility. The fix is not more complex; it is a tighter linkage between assumptions and drivers.

A bottom-up forecast starts with capacity, pricing, conversion rates, and retention. A top-down forecast starts with market size and share assumptions. Bottom-up models usually land better in small-business diligence because buyers can test them against reality.

If you use forecasts to support valuation, keep them grounded:

• Tie growth to pipeline or historical conversion, not hope

• Run sensitivities on the two to three drivers that matter most

• Use forecasts to explain range, not to justify a single number

A lightweight DCF can be a useful intrinsic value check when drivers are stable, because discounting future cash flows reflects the real cost of capital in the market.

Forecasting does not need to be perfect; it needs to be legible and defensible.

Common Valuation Pitfalls to Avoid

Most valuation mistakes are not mathematical; they are behavioral. Sellers anchor on their best year, overstate adjustments, or forget that a buyer has to replace them.

The most common pitfalls include overstating add-backs, ignoring owner replacement cost, treating one great year as the new normal, and mixing personal and business cash flows. Seasonality and cyclicality also distort results. A business can look like it is “growing” when it is really just shifting revenue timing.

If you want a valuation that survives diligence, build it the way a buyer will: conservatively, with documentation, and with a clear view of what changes under new ownership.

A realistic range is not pessimism; it is a smoother path to close.

A Simple, Repeatable Valuation Workflow

Valuation becomes easier when you stop treating it as a one-time event and start treating it as a repeatable process. A consistent valuation workflow also makes your business easier to diligence, which tends to improve certainty and reduce renegotiation.

Here is a simple approach you can reuse:

1. Compile three years of financials, normalize to SDE or EBITDA

2. Document add-backs with support and set a working capital baseline

3. Choose primary and secondary methods that fit your model

4. Gather comps and apply defensible adjustments

5. Cross-check with an income or asset view

6. Produce a range, attach assumptions, and run a lender’s lens sanity check

If you want a deeper definition of what the process is called and how professionals frame it, Baton’s explainer on business appraisal is a good reference point.

A strong valuation workflow is less about precision and more about reducing unpleasant surprises.

Market Conditions Change, So Will Your Valuation

Valuation does not happen in a vacuum. Financing costs, buyer confidence, and credit availability flow directly into how buyers price risk.

In plain terms: When interest rates rise, borrowing gets more expensive, so many buyers need either a lower price, better terms, or both. When rates fall, buyers can often support higher multiples because the same cash flow can service more debt. That is one reason multiples often soften in high-rate periods and expand when credit conditions improve.

There is another market reality that surprises sellers: When conditions feel worse, more owners often decide to sell. That can increase supply and make the environment less seller-friendly, even though serious buyers still show up. Many buyers are not only “investors,” but they are also buying a job, a lifestyle, or an operating platform. Deal activity continues, but structure matters more.

Buyer type also changes speed and certainty. A private equity buyer may have tighter return targets but can often bring more cash to closing. 

An owner-operator may move fast emotionally, but rely more on financing, and sometimes on seller notes or earn-outs if credit is thinner. That is why terms can vary dramatically for the same company, depending on who is across the table.

Market conditions are not just background noise; they are part of the valuation math and the deal structure.

Glossary, Minus the Jargon

If valuation language makes the process feel harder than it is, this is the reset. 

These are the terms that show up in almost every deal, explained plainly:

• Enterprise value vs equity value: Enterprise value is the value of the operating business. Equity value is what the seller receives after cash, debt, and working capital adjustments.

• Comparable company analysis and precedent transactions: Comparable analysis looks at how similar companies are valued, often using multiples. Precedent transactions look at actual deals that closed, which can be more relevant when available.

• Discounted cash flow, revenue multiples, book value, liquidation value: DCF estimates intrinsic value from future cash flows discounted to today. Revenue multiples are a rough screening shortcut. Book value is the accounting value. Liquidation value is what you would get if you sold assets off quickly.

• Market checks using public data to inform private pricing: Even in private deals, buyers look at public signals (rates, capital availability, sector performance) to decide what risk is worth paying for.

Once these terms are clear, valuation stops feeling like a black box and starts feeling like a decision you can manage.

Put a Price on Progress

A good valuation does not just tell you what the business might sell for. It tells you what would need to be true for a buyer to pay it, and what would need to improve if you want to move the range.

If you want to move from theory to a supported number, start by pressure-testing your earnings, documenting add-backs, and sanity-checking with the market. From there, you can value your business with a clearer view of how buyers and lenders will see it.

When you are ready, you can also get a business valuation and test the market privately for free to calibrate your range against real buyer demand without giving up control.