Somewhere right now a seller is naming a price the way people name prices for a house they love: by what they need, what they heard a similar business "went for," and what the years of work feel like they were worth. None of those are what the business is worth to you. And here's the uncomfortable truth this post is built on: there is no formula that spits out the right price. What exists is a discipline — a way of building your own number from evidence — and a set of traps. Anyone selling you certainty beyond that, including any calculator (including ours), is overselling. Let's do the discipline.
Step one: find the real earnings — this is most of the work
A small business's value hangs on one question: how much cash does it genuinely generate for its owner? Not revenue. Not the seller's P&L bottom line. The real, defensible cash.
The standard lens for owner-operated businesses is seller's discretionary earnings (SDE) — the arithmetic of "what does this business actually put in the pocket of one full-time owner-operator." You build it, roughly, like this: start from the tax-return profit (the story told to the government, not the listing), add back the seller's own salary and personal expenses run through the business, add back genuinely one-time costs — then subtract what the seller conveniently left out, and this is where deals are won and lost:
- Unpaid labor. The seller's spouse who did the books for free, the sixty-hour weeks the "owner salary" never reflected. If you won't work those hours, someone paid will.
- Deferred spending. The machines, roofs, doors, or vans that are aging toward a bill. A business that looks profitable because nothing was maintained is borrowing from your first years.
- Departing advantages. Below-market rent about to reset, a customer loyal to the seller personally, a license arrangement that doesn't transfer. Earnings you can't keep aren't earnings.
Test every add-back the seller claims. "One-time expense" is the most flexible phrase in small business sales; some are real, and some recur annually under different names. Ask for the evidence behind each one, and involve your CPA — genuinely, not as a formality, because tax returns, add-backs, and deal structure are their home turf and this post is education, not accounting advice.
Notice: everything above is the verification work from due diligence, and the vertical posts on this blog — buying a laundromat and reading its numbers, campgrounds, storage, HVAC — are each mostly about where those adjustments hide in that specific business. Valuation isn't a step after diligence. It's the output of diligence.
Step two: apply a multiple — and here's why we won't tell you which one
Small businesses are commonly priced as a multiple of SDE. And the moment you know that, you'll go searching for the multiple — where you'll find articles stating figures with confidence and citing nothing. A multiple quoted without a dataset behind it is somebody's marketing. Real datasets do exist — BizBuySell, for one, publishes an average SDE multiple drawn from businesses that actually sold — but an average spanning every industry and every size is a reading of the market's temperature, not a price for the deal in front of you. Real multiples vary — by industry, size, growth, how much of the business depends on the departing owner, how transferable the earnings are, and local market conditions.
What you can do instead of trusting a stranger's number: ask brokers active in your specific vertical what comparable businesses have actually sold for (asked-versus-sold matters — listings are wishes); ask your CPA and lender what they see; and — most concretely — run the financeability math below, which caps what any multiple can be for you regardless of what an article says.
What moves a multiple is worth internalizing, because it's your negotiation map: earnings that survive the owner leaving are worth more than earnings that are really the owner's personal output. Recurring, contracted, or habitual revenue beats project revenue. Verified beats claimed — an unverifiable "there's extra cash" claim is worth exactly nothing. And risk concentration — one big customer, one key employee, one short lease — pushes value down in a way sellers rarely price into their own asking number.
Step three: let the financing math sanity-check your number
Here's the most practical valuation tool most first-time buyers never use. If you're financing the purchase, the deal has to work as a loan: the business's real cash flow must cover the loan payments with room to spare, pay you enough to live, and leave a cushion. Take your rebuilt earnings number, subtract a real salary for yourself, and ask what loan payment the remainder could safely support — then ask what purchase price that payment implies at terms a lender would actually offer (a conversation, not a guess — here's what lenders look at).
If the asking price requires debt the cash flow can't defend, the price is wrong for any buyer who isn't paying cash — which is most of the market. That's not you being cheap. That's arithmetic, and it's the most defensible thing you can bring to a negotiation: not "I feel it's worth less," but "here is the earnings evidence, and here is the debt it can support." And if the lender wants a business plan alongside the file, the source-every-number discipline in a food truck business plan a lender will actually read generalizes to any acquisition.
The traps, quickly
Anchoring on the asking price. It's the seller's opening story, not a data point about value. Build your number blind, then compare. Paying for potential. "You could raise prices / add services / expand" — maybe, but then you're creating that value; why pay the seller for work you haven't done yet? Price the business that exists. Falling for the deal you've spent time on. Sunk months feel like a reason to close. They aren't. The best valuation discipline is a full walk-away below your number — which requires having a number before you're in love.
And through all of it: this is education, not investment advice. Your CPA on the numbers and structure, your attorney on the agreement — for a specific deal, there's no substitute.
A number is worth what it survives. Score the deal, then test whether its cash flow covers the debt — check this deal free.
The earnings rebuild and valuation worksheet that walk this exact process are built for the industry you’re buying into: find my industry.