Table of Contents
How do you value a business? A small business can be valued by asset-based, market, and income approaches, among others. Knowing the worth of your enterprise can be important intel if you’re looking to grow, sell, exit, or buy one. While there are professionals who specialize in business valuations, there are also DIY techniques that are helpful if you want to develop a solid estimate.
Key Points
• Valuing a small business helps establish a data-driven benchmark for performance tracking, growth planning, and strategic decision-making.
• Business owners can estimate their enterprise’s worth when preparing for growth, a company sale, or founder exit, or when they’re seeking potential investors.
• Asset-based valuation methods calculate net worth by determining the fair market value of owned assets and subtracting liabilities.
• The market approach estimates company value by analyzing recently sold or publicly traded comparable businesses within the same sector.
• The income approach evaluates future earning potential using discounted cash flow analysis or capitalization of earnings techniques.
Why Business Valuation Matters
Business valuation matters for several reasons, especially planning for growth or selling the company. The reasons why this process can be important include:
• Valuing a business can provide a data-driven benchmark of a company’s worth. This may be used for performance tracking and business planning.
• It can offer insights into the company’s economic worth if it’s considering a sale or when a principal is planning an exit.
• A business valuation gives potential investors or buyers information they need to make a decision.
In these ways, having a current, accurate sense of a business’s worth can be a powerful tool in managing an enterprise, making decisions about, say, taking out a small business loan to enhance growth, or setting an appropriate price when selling.
Recommended: Business Acquisition Loans
Three Core Business Valuation Methods
If you’re wondering how to value a small business, there are three main techniques: asset-based, market, and income methods. Here’s more information on each.
Asset-Based Approach
With an asset-based method of valuing a business, you calculate the fair market value of everything that the business owns outright to determine its worth. These assets can include real estate, equipment/machinery, and inventory. Since some assets, such as equipment, can depreciate, it may be a good idea to check how much a certain type of machinery that you own, say, would sell for today.
Once you have the figure representing what your assets are worth, you deduct any debts (such as a small business loan) and liabilities. This gives you the value of the business in terms of its net assets. This method can be useful when you’re making internal projections and seeing how your spending on assets is tracking. It’s likely to be most useful for businesses that have invested a considerable amount in real estate and equipment.
However, this business valuation method may not capture the revenue, earnings, and growth you have likely worked hard to achieve. Nor does it necessarily reflect the potential of a business that operates without much investment in property and machinery. The valuation techniques below can play a larger role in accounting for that information.
Market Approach
With a market approach, you can estimate an enterprise’s value by considering other businesses like it that have recently been sold or that are publicly traded. This is similar to how, when you sell a house, you might look at what are known as comparables to help set your listing price.
With the market approach, you can look at data from businesses that were recently sold in your area and then adjust for variations in the size, risk, and other facets of the companies. You can incorporate real-world data from websites like BizBuySell or work with a business broker near you. This can be helpful information if you’re looking to exit, sell, or buy out a business partner.
Income Approach
With the income approach, the value of a business is determined in terms of how much income it can likely generate in the future. There are two methods that are frequently used to do this.
• Discounted cash flow (DCF). This is based on forecasts of a business’s cash flow in the future, adjusting the figure based on the risk that would be involved in buying the business. Typically, this technique is used for enterprises that have the potential to grow quickly but aren’t yet making a profit. To put it another way, it can be best for businesses for which profitability is likely to fluctuate.
• Capitalization of earnings. With this method, the goal is to determine the future profitability of an enterprise, but it’s conducted using cash flow, the yearly return rate, and the anticipated value of the company. Unlike the DCF technique, this valuation generally operates on a principle of consistency, meaning it’s usually a better option for businesses with steady growth and finances.
Recommended: Business for Sale: Owner Financing, Defined and Explained
Example: Valuing a Small Business
If you want to determine the valuation of a small business (for instance, when you’re contemplating a working capital loan or line of credit as you scale), you might use a method that combines aspects of the market and income approaches outlined above. This is called SDE (Seller’s Discretionary Earnings), and here are the three steps involved in it.
• Calculate the SDE by taking the pretax net income (let’s say $200,000), add in the owner’s salary ($80,000), and any personal expenses (perhaps $5,000 in travel). This gives you the adjusted SDE.
SDE = $200,000 + $80,000 + $5,000 = $285,000
• Apply an industry multiple. An industry multiple is a statistical ratio that uses recent data from sales of similar companies. (You can look up industry-specific multipliers online.) For small businesses, industry multiples are typically between one and five. If we use a multiple of 2.0 and multiply it by the adjusted SDE we get the indicated enterprise value.
Indicated enterprise value = $285,000 x 2 = $570,000
• Adjust the value for assets and liabilities. In this step, you’ll add assets such as inventory, equipment, and real estate, as well as subtract any liabilities, such as debt.
$570,000 + $60,000 in assets – $50,000 in debts = $580,000
That figure of $580,000 is your final estimated business value. This number can be helpful if you’re wondering how to sell a small business, grow it, or exit.
Recommended: How to Price a Business for Sale
Factors That Can Raise or Lower a Business’s Value
There are a number of factors that can raise or lower a business’s value, including pricing, management structure, and the composition of your customer base. Consider these specifics:
Factors That Raise Business Value
These elements can include the following:
• Consistent revenue growth
• Solid profit margins
• Clean audit record
• Clear operating procedures and dependable management beyond the founder(s)
• Diversified customer base with no single client accounting for more than 10% of revenue
• Operating in a high-growth market sector and/or having proprietary technology/IP
Factors That Lower Business Value
Things that may reduce a business’s value can include:
• Stagnant, erratic, or declining revenue
• Narrow profit margins; poor cash flow
• Audit/compliance issues
• Overreliance on the founder(s) to carry the business
• Customer concentration so that a single or a few clients are responsible for a large portion of revenue
• Operating in a stagnant sector and/or lacking a proprietary point of differentiation
Other Factors That Influence Business Value
Influences in the general environment can also play a role. Other factors that can impact a business’s worth include regulatory pressure, IT infrastructure, economic forces (such as interest rates), and accounting practices (like whether business vs. personal expenses have been properly separated).
The Takeaway
A small business valuation can be calculated in several different ways, such as the asset-based, income, and market methods. Each of these can provide insights into an enterprise’s value, which can be useful when planning an exit, selling a company, or targeting growth.
If you’re looking to grow a business, a small business loan could be a path to developing its value.
Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.
FAQ
What is the easiest way to value a small business?
When it comes to how to value a small business, different techniques may work better for certain types of business. Overall, many people may find the three-step SDE (Seller’s Discretionary Earnings) method useful. It involves calculating the SDE, factoring in a multiplier, and then adjusting for assets and liabilities.
How many times revenue is a business worth?
The answer to how many times revenue a business is worth depends on such factors as the industry in which the enterprise operates, profit margins, and other facets of the business’s income. A broad estimate is that many small businesses are worth between 0.3 and 3 times the revenue they earn per year.
Do I need a professional appraiser to value my business?
Whether you need a professional appraiser to value your business or not depends on your goal. If the valuation is required for certain loans/restructuring plans, legal proceedings, tax and estate compliance, or selling shares of an employee stock ownership plan, then you likely will need a professional appraiser.
How does customer concentration affect business value?
Customer concentration can lower a small business valuation. Customer concentration occurs when a large percentage of revenue comes from a single customer or a small group of customers. This could leave a company in a vulnerable state if the client(s) were to take their business elsewhere.
Can I value a business without an accountant?
As for how you value a small business, you can probably get a rough figure when valuing a business without an accountant and use this number for internal purposes, However, you’ll generally need an accountant if a business valuation is needed for business transactions, tax filing, litigation, or other professional purposes.
Photo credit: iStock/Eleganza
This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
SOSMB-Q426-013