What is my business worth? How buyers actually decide

From Matt Behrens, who has bought businesses for 15 years · 2026-10-02

Most owners I talk to have a number in their head. It usually comes from a friend's sale, a rule of thumb, or what they think the business is "worth" after years of work. A buyer arrives at a number a different way, and once you see how, you can change it.

Buyers pay for earnings they can count on

For a small, owner-run business, a buyer starts with one figure: how much money the business would make for a new owner. The common name for this is seller's discretion earnings, or SDE. For larger businesses with managers in place, it's usually EBITDA.

In plain terms, SDE is:

• the business's profit before tax and interest,
• plus the owner's pay and perks,
• plus one-time or personal expenses that run through the business (the add-backs).

Then the buyer applies a multiple. A business that earns $400,000 in SDE and sells at 2.5 to 3.5 times earnings would price between $1.0 million and $1.4 million. That is an illustration, not a prediction. Real multiples vary widely by industry, size, growth and risk.

The multiple is a measure of risk

Two businesses with the same earnings can sell for very different prices. The multiple reflects how much a buyer trusts the earnings to continue. A higher multiple means fewer doubts. What tends to lower it:

• The business depends on the owner. If customers, suppliers or know-how all run through you, a buyer is buying your job, not a business.
• Customers are concentrated. One customer at 30% of revenue is a risk the buyer will price in.
• The records are loose. If a buyer cannot tie the numbers to tax returns and bank statements, they discount what they cannot prove.
• Earnings are falling or volatile. Buyers pay for a trend they believe in.
• Work the buyer would have to do. Hiring a manager, fixing the books, replacing old equipment: all of it comes off the price.

Add-backs: where owners gain and lose credibility

Add-backs are expenses in your books that a buyer agrees are not part of running the business going forward, such as your own above-market pay, personal costs the company paid for you, or a true one-time expense. Adding them back to your reported profit raises earnings (SDE), and higher earnings raise price. Buyers accept the ones they can verify: the owner's salary, a family member's pay that is not a real job, personal vehicle costs, a one-time legal settlement. They push back on vague ones: "I'd cut that cost if I were new," or large round numbers with no invoices.

Matt's experience: When I see an owner claiming dubious add-backs, the hair on my arms goes up. If you don't need that software subscription, why are you paying for it? A "one-time" legal expense that shows up every year tells me the expense is recurring, or that there is a legal risk. If you are pushing the boundaries on what counts as a true, recurring business expense, why would I believe the rest of what you are telling me about the business? I immediately assume there is more risk in everything else, and I lower what I am willing to pay.

A short, well-documented list beats a long, hopeful one.

How to see your business the way a buyer will

1. Work out your real earnings. Start with profit from your tax return, add back owner pay and documented one-time items.
2. Check three years, not one. Buyers look at the trend.
3. Ask the uncomfortable questions. If you left for 30 days, what would stop? How much would your biggest customer's departure hurt?
4. Fix what you can, sooner. Improving the multiple takes months or years. That is why starting 12 to 24 months before a sale pays off. There are meaningful steps you can take in a shorter time, but the biggest movers take time to implement.

Common questions

Is there a simple rule of thumb for what a business is worth?

Rules of thumb exist, such as a multiple of earnings or a percentage of revenue, but they hide the details that move price the most. Use them as a starting point, then adjust for risk, records, and how much the business depends on you. A big cause of frustration, and of dead deals, is assuming that because a friend sold their business for a certain multiple of earnings, yours is worth the same. Industry, growth, size, management team, margins, customer base, working capital needs and processes all change what is possible and how risky the business looks, and so what a buyer will pay.

Is my business worth more if I own the building?

Real estate is usually valued separately from the business. A buyer may buy both, lease the property from you, or buy the business alone. How you handle it affects your total proceeds. In general, operating businesses and real estate are valued very differently, and not all buyers want both. Occupied commercial real estate can be financed with a lot of debt and typically has less downside and less upside. An operating business has more of both and takes more equity to finance. For these reasons, investors often prefer not to buy the two together.

Does a business appraisal give me a real price?

An appraisal gives an opinion of value, and is often used for tax, legal or contractual purposes. The price is what a specific buyer will pay under specific terms. The two can differ, which is why preparing the business matters as much as knowing the number.

This guide is educational planning information, not an appraisal and not tax, legal or investment advice.