Whether you’re planning an exit, considering a sale, or simply want to know what your business is worth, understanding the basics of valuation is essential. These FAQ’s answer the most common questions business owners ask in clear, plain-English terms.
Business Valuation Basics
What exactly is a business valuation and why do I need one?
A business valuation is a professional estimate of what your company is worth today. It’s important because your business is likely your largest asset and a valuation gives you clarity for exit planning, financing, or even succession.
How often should I update the valuation of my business?
Ideally, once a year. Market conditions, financial performance, and industry changes can all impact your valuation.
What’s the difference between a 'rule of thumb' multiple and a professional valuation?
Rules of thumb use a simple revenue or earnings multiple, but they often miss the unique drivers of your business. A professional valuation digs into financials, assets, risks, and growth potential for a more accurate number.
Financial Performance & SDE
What is SDE (Seller’s Discretionary Earnings), and why is it important?
SDE is the total financial benefit a business owner gets from the business, including profit, salary, perks, and discretionary expenses. It’s often the foundation for valuing small businesses because it shows the true cash flow available to a buyer.
How do I calculate personal benefits and owner perks that run through my Profit & Loss statement?
You add back expenses such as your salary, health insurance, auto expenses, or other personal benefits to the net income. This gives a clearer picture of the company’s profitability for a new owner.
Which expenses can be 'added back' to show a truer picture of profitability?
Owner’s salary, one-time expenses, family member wages not required by the business, personal travel, and discretionary perks are commonly added back.
Do one-time or non-recurring expenses affect my valuation?
Yes, valuators usually adjust for unusual expenses (like moving costs or legal settlements) to reflect ongoing earnings.
Assets & Liabilities
How do assets and liabilities show up in my business valuation?
Assets add to value while liabilities reduce it. The balance between the two impacts equity value.
What’s the difference between asset value and equity value?
Asset value is the worth of your company’s assets (like equipment, inventory, or property). Equity value is assets minus liabilities—what the owner actually keeps.
If my business owns real estate, is that included in the valuation?
Yes, real estate is usually valued separately and added to the overall business value, depending on whether it’s part of the sale.
How does succession planning fit into exit planning
Succession planning is one type of exit planning. Instead of selling to a third party, succession planning prepares for family members, partners, or employees to take over.
What about equipment that’s fully depreciated on my books—does it still add value?
Yes. Even if it’s written down for accounting, equipment can still carry fair market value and contribute to the overall business value.
Do outstanding loans or debt reduce my valuation dollar for dollar?
Yes, debt reduces equity value. Buyers care about how much they’ll owe after purchasing the business.
Business Valuation Types
What is an 'asset sale value' versus an 'equity value' versus an 'enterprise value'?
An asset sale value is the worth of tangible and intangible assets only. Equity value is assets minus liabilities. Enterprise value includes equity plus debt, minus cash—often used for larger businesses.
Which valuation type matters most when I want to sell my company?
It depends on the deal structure. Small business sales often focus on asset value, while larger deals use enterprise value.
How do buyers decide between paying for assets or buying equity?
Buyers often prefer asset sales to avoid inheriting liabilities. Equity sales may be better for tax or contractual reasons.
Market & Multiples
What multiples are buyers paying in my industry today?
Multiples vary by industry, growth potential, and risk. Service businesses may sell for 2–3x SDE, while specialized industries can command higher multiples.
How does market timing impact my valuation?
Strong economies, favorable industry trends, and buyer demand can increase valuation. Market downturns can lower it.
Why do some businesses with the same revenue sell for very different prices?
Because value is driven by more than revenue—things like recurring income, customer diversity, systems, and risk profile make a big difference.
Exit & Planning
When should I start planning my exit to maximize valuation?
At least 3–5 years before selling. Early planning gives you time to improve value drivers and attract better buyers.
What can I do in the next 12 months to improve my business’s value?
Focus on diversifying customers, strengthening recurring revenue, improving financial records, and reducing reliance on you personally.
How will employees, contracts, or customer concentration affect valuation?
High dependency on one person, one customer, or weak contracts lowers value. Stability and diversity raise it.
Do I need perfect financial records to sell my business?
No, but clean and accurate records are critical. Buyers will discount heavily if they don’t trust the numbers.
