How to Sell My Business With a Broker: Step 1, the Valuation

How much is my business worth?

How much is my business worth is usually the first question that business owners ask when they start exploring a sale. And it's usually also the first thing that we work through together in the selling process. In this video, I'll cover what drives value for a small business. I'll go through some of the rules of thumb that can help you identify how much a business like yours could sell for. And then I'll go through exactly what happens when you get a valuation done with us, including a brief walkthrough of the report that you get at the end.

This series and Stage 1: valuation

I'm Ed. I'm a business broker and the founder of Sundance Financial. We help sell small businesses all over the US. This video is the first deep dive in my series on the four stages in a business sale. If you haven't seen the overview yet, which goes through the four stages at high level, I'll leave a link to that in the description below. The first stage, which we're going to go through today, is valuation, which usually takes about a week from start to finish.

What drives value: size and quality

For a small business, value largely comes down to two things, its size and its quality. Now, size is the obvious one. Buyers will be looking at how much the business earns and more specifically, how much cash it generates for its owner. Buyers aren't really buying your business's revenue, they're buying the cash flow that the business throws off every year.

Size: seller's discretionary earnings (SDE)

For most small businesses, this is measured by what's called seller's discretionary earnings or SDE. In short, it's your profit with your own salary added back along with any personal or one-off expenses that a new owner wouldn't have to incur. I've done a full video on SDE, which I'll link in the description below.

Quality: risk and predictability

Now, quality, on the other hand, can mean a lot of things, but there are probably two main things that buyers are looking at. The first is risk or how predictable those earnings are. Is revenue steady or growing year on year or does it jump around a lot? Do you have repeat customers and contracts or does every month start again from zero? And is a big chunk of the revenue tied up in just one or two customers or do you have a well-diversified base? The more predictable the business's earnings, the less risk that a buyer has to take on and the more that they'll be willing to pay for the business.

Owner dependence: buying a job

Now, the second factor here is owner dependence. If you're heavily involved in the day-to-day operation of the business and the customers, the key relationships and the know-how all sit with you, then the buyer isn't really buying a business. They're more so buying a job and they have to worry that a lot of what makes that job work walks out the door with you. In other words, the more that the business can run independently without you, the more it'll be worth to a potential buyer.

Rule of thumb: what small businesses sell for

Now, if you combine those factors, what you'll find is that on average, a healthy small business will sell for something around two to three times SDE, but there's a wide spread, and as a general rule of thumb, it looks something like this. If the business is small and you work full time in it, then the multiple will tend to sit on the lower side at about one to one and a half times SDE. As I mentioned, the more hours that you're putting in personally to this business, the more that the buyer is really just buying a job. And most buyers don't really want that. Once the business is a bit larger, you've probably got a small team around you and the business doesn't necessarily live or die on you personally.

In that case, you're in the most common category of small businesses at about two to three times SDE.

Larger businesses: EBITDA multiples

Now, once earnings get past roughly a million dollars of SDE, you probably have a real management team in place and buyers will tend to switch to EBITDA, which in simple terms is just your earnings after paying someone a market salary to run the business. Multiples there can range from about three to five times EBITDA. Once the business gets even larger than that, it'll start to attract professional and institutional buyers, at which point you could see multiples north of five times EBITDA. In this series, however, we're going to focus on how this all works for the smaller businesses. Now, if you want to go deeper on how valuations are actually done and the math that sits behind them, I've done a four-part series on this exact topic.

And I'll link that in the description below as well.

How it works: 1A, the 15-minute call

So what does the valuation process actually look like when you work with us? There are generally about three stages and they all happen within about a week. First, at the very start of the process, we'll go through a 15-minute introductory call. This is really just to help us understand your situation and the rough shape of your business. And we'll typically ask you things like what the business does, how long you've owned it, roughly how much it does in revenue and profit, and what your role looks like on a day-to-day, as well as why you're thinking about selling and when. From that information, we can generally give you a high level estimate of what we think we could get for your business on the market.

Now, this is obviously a ballpark, not a valuation, but it's usually enough to tell you whether it's worth exploring further.

1B: NDA, financials and the recast

If you then decide that it is worth exploring further, we'll take the opportunity to look at your numbers properly. We'll sign a non-disclosure agreement so that everything you share stays confidential. And then we ask you for your financial statements. These will typically include the last three years of the business's tax returns. And then depending on how far into the year we are, year-to-date monthly financials, which are generally your monthly profit and loss statement. Now that's usually enough as a starting point, but depending on your situation, we may ask you for a little bit more. For example, a list of personal expenses that you run through the business or the financials for a second entity if the business is split across into two.

Once we have all that information, we then recast the financials. What that means is we go through your financials line by line and adjust the reported numbers to calculate SDE so that we can show you what the business actually earns on a standalone basis. We'll usually come back to you with a few questions here, most of which are about the expenses which are once-off or personal in nature.

Benchmarks and the buyer's view

Then once we have a good grasp on what your numbers look like, we compare your figures against thousands of businesses in your industry and against real sale prices for businesses like yours from several transaction databases that we have access to. We'll also check our valuation from the buyer's perspective too. At a given price, can a buyer actually afford the business and still earn a fair return?

1C: the opinion of value and a sample report

Finally, we put it all together in a written opinion of value and give you a call to walk through what your business could be worth and why. Let me show you quickly what that looks like. So this is a sample report for a fictional HVAC contractor. So every figure in this report is made up, but we generally use the same format and a similar methodology for every client.

Most probable selling price

Now, the first page is the headline, the most probable selling price. Here you can see that that sits at about one point three million dollars based on three things. First, an SDE of about $440,000. Second, our assessment of how the business performs against similar businesses, which in this case is above average at the 60th percentile, and then third, the multiple that the combination of those factors gives you, which in this case is two point nine times SDE.

The SDE calculation and weighting

On the next page, we go through the SDE calculation. This page gives three years' worth of revenue, costs and profit, and then some of the adbacks that we make in order to get down the SDE line. Those could include things like the owner's salary, their personal health insurance, the personal share of the company vehicle, as well as any one time expenses that a new owner may not need to incur. In terms of calculating SDE, we sometimes like to use an average as opposed to just the most recent year. And in those situations, we'll generally weight the most recent year most heavily. In this example, you can see that we've weighted 2025 at 50 percent and the prior two years at just 25 percent each, which gets us to an average of $440,000 on which we value the business.

Industry benchmark

Now, once we understand what the business's financials look like, we'll then benchmark it against thousands of other similar businesses. In this case, we're comparing the company in question to plumbing, heating and air conditioning contractors. You can see on the page here that the business we're looking at has margins at roughly double the industry average, but revenue at about a quarter below it. So you can see that the size and the quality factors I mentioned earlier in this video are showing up in the valuation again.

The valuation football field

Now, page seven is what we call the football field. Each bar represents a range of valuations of the business based on multiples we source from different transaction databases, as well as a buyer-return model on the right hand side. We put this all on one chart and then take an average of it to estimate the most probable selling price for the business. What we also do is adjust that most probable selling price based on our assessment of how this business compares to its competitors. In this case, we've noted that the business is above average sitting at the 60th percentile, and we adjust the valuation or most probable selling price a little bit up because of that.

Appendix: approaches and returns model

Now, finally, at the back, there's an appendix which explains every valuation approach and the full returns model that a buyer would run. We make sure that we go through this entire report with you so that you understand not just what the headline number is, but what's driving it, how it's calculated, and if there's anything that you can do to move the number.

Your part in the valuation

Now, your part in the valuation stage of this selling process is relatively small. What you need to do is first take the introductory call with us, then send us some of the documents and information we request, as well as answer any clarifying questions we have about your business. We generally take care of the rest and the whole thing usually takes up to about once we have those initial documents from you.

Recap

So to recap, the value of a small business largely comes down to size and quality. That's how much cash the business generates and how predictable that cash is, as well as how much the business depends on you personally. With us, getting a valuation is a 15 minute call, a couple of documents, as well as a written report, which you'll usually receive within a week.

Next: Stage 2, preparation

If you decide to move forward, the next stage is preparation, where we start putting together the marketing documents for the business, as well as the data room that we'll show to serious buyers. That's the next video in this series.

Book a free 15-minute call

If you're thinking about selling, the easiest first step is to take that 15 minute call. It's no obligation and strictly confidential. You can request one in the link just below this video. As always, I'm Ed from Sundance Financial and I'll see you in the next one.