How to value a small business

What are the three ways to value a small business?

Appraisers use three approaches, and every business valuation you will ever read is one of them or a reconciliation of two. The market approach prices the company against what comparable businesses sold for, as a multiple of earnings or, less usefully, of revenue. The income approach converts the earnings the business is expected to produce into a present value, either by capitalizing one year of earnings at a rate of return or by discounting several years of projected cash flow. The asset approach adds up what the business owns, equipment, vehicles, inventory and receivables at fair value, less what it owes, and calls the result the floor.

For the businesses we represent, $1 million to $15 million in revenue in Cook and the collar counties, the market approach sets the price and the other two keep it honest. A company whose equipment is worth more than three times its earnings is priced on the equipment. A company whose earnings cannot carry a loan at the multiple the owner wants is repriced by the bank, whatever the comparables say.

Which method do buyers actually use for a business under $5 million?

The market approach, on earnings. An individual buyer with an SBA loan, a competitor in the next county and a private-equity platform all start the same way: they rebuild the earnings, decide whether to call them SDE or EBITDA, and apply a multiple from the deals they have seen or the surveys they read. The IBBA and M&A Source Market Pulse survey, which polls the brokers and advisors who closed the deals, reports the medians buyers are paying by size band every quarter; BizBuySell publishes closed-sale multiples by industry and by metro. Those two sources are where almost every small-business price in Chicagoland comes from, and both are quoted with their periods on how much is my business worth.

The income approach shows up in two places. A credentialed appraiser will usually run a capitalization-of-earnings calculation beside the market multiples and reconcile the two; for an owner-run company they land close together, because a multiple is a capitalization rate turned upside down. The second place is the bank. An SBA lender does not care what the comparables say if the historical earnings will not cover the loan payment with room to spare, and since October 1, 2026 that room is 1.25 times for an acquisition, under the SBA's SOP 50 10 8.1. The asset approach is run on every deal for the allocation and matters most where the hard assets are large relative to earnings: a machine shop with a floor full of paid-off CNC equipment, a trucking company, a distributor carrying heavy inventory.

How do I value a small business step by step?

Five steps. The first one is most of the work and most of the arguments.

1. Rebuild the earnings

   Start from the pre-tax profit on the federal return, not the internal P&L. Add back interest, depreciation and amortization, one working owner's full compensation, and the personal and one-time expenses run through the business, each tied to a ledger account and a receipt. Set family payroll and related-party rent to market. The result is seller's discretionary earnings; the line-by-line formula and the add-backs a buyer's accountant accepts and rejects are on that page.

2. Pick the earnings basis

   Deals under about $2 million in value are priced on SDE and deals above it on EBITDA, which deducts a market salary for the manager who replaces you (Market Pulse, 2026). Using an EBITDA multiple on an SDE number prices the company about a third high, and it is the single most common mistake in owner-prepared valuations.

3. Apply the multiple paid for your size and industry

   Size first, then industry. Market Pulse medians for the first half of 2026: 2.0 times SDE under $500,000 of value, 2.8 times from $500,000 to $1 million, 3.0 times from $1 million to $2 million, then 4.0 times EBITDA from $2 million to $5 million. Inside each band, BizBuySell's closed sales put manufacturing and distribution at roughly 2.7 to 3.1 times SDE and the trades at 2.3 to 2.6. The full tables, with the publisher and period on every row, are in what Chicagoland businesses actually sell for.

4. Move inside the range on the five things buyers test

   Books that reconcile to the tax returns and the bank statements, a company that runs for a month without the owner, no customer over about 20 percent of revenue, written procedures and a monthly close, and a deal file assembled before diligence asks. Each one present moves the price toward the top of its range; each one missing moves it toward the bottom, or into an earnout. The arithmetic on a $380,000-SDE HVAC company is on the valuation page: about $250,000 between the two versions of the same earnings.

5. Test that a lender will finance it

   Take the price, subtract the buyer's 10 percent equity injection, amortize the rest over ten years at today's SBA rate, and divide the historical EBITDA by the annual payment. If the answer is under 1.25, the price does not close with bank money at that structure, and the difference comes out as a lower price, a seller note on standby or more buyer equity. The method the bank uses is in the next section.

How do I value a business based on revenue?

Carefully, and only as a cross-check. Revenue multiples are published, so owners reach for them: BizBuySell's closed sales in the Chicago metro averaged 0.63 times revenue in 2024, and national sales under $1 million closed at 0.62 times revenue in the third quarter of 2026. The trouble is that revenue says nothing about what the business keeps. Two Chicagoland companies with $3 million in sales can be worth $900,000 and $2 million because one keeps $300,000 and the other $650,000, and a revenue multiple prices them the same. Buyers and lenders price earnings. The one place a revenue multiple is the convention is a small professional practice, an accounting firm or an insurance book, where the revenue is recurring and the buyer is pricing the client list. For manufacturing, distribution, the trades, logistics and most services, use the earnings method and let the revenue multiple tell you whether the result is in a believable range.

What does the asset approach tell me?

Two things. First, the floor: if the equipment, vehicles and inventory conveyed in the sale are worth more at fair market value than the earnings method produces, the business is worth its assets and a buyer who wants the earnings pays for the assets anyway. That happens in asset-heavy trades with thin margins, and it is the reason some Chicago-area machine shops and trucking companies sell for more than their SDE would suggest. Second, the allocation. In an asset sale, which is how most small businesses change hands, the price is split on IRS Form 8594 between the tangible assets at their appraised values and the goodwill that is left over, and that split sets the buyer's depreciation and the seller's tax on the proceeds. A $1.5 million price with $600,000 of equipment and inventory carries $900,000 of goodwill, and the two sides have opposite interests in how the line is drawn. We do not give tax advice; we do make sure the allocation is on the table before the letter of intent and not after.

What the asset approach does not do is value the business as a going concern. Receivables, cash and the lease are usually settled separately at closing, and the customer relationships, the trained crew and the phone that rings are not on the balance sheet at all. For most profitable companies under $5 million, the asset value is a fraction of the earnings value, and that fraction is the goodwill a buyer is financing.

Will a lender's appraiser agree with my number?

If the number was built the way this page describes, usually yes, because the appraiser is building it the same way from the same documents. The SBA's SOP 50 10 8.1, effective for loans numbered on or after October 1, 2026, sets the rules for every 7(a) acquisition loan, and they are worth knowing before you set a price. The business valuation must come from an independent qualified source holding an ASA, CBA, ABV, CVA or BCA credential, requested by and prepared for the lender; the lender may not use one prepared for the buyer or the seller. The valuation must support the purchase price, and where the price paid exceeds it, the difference must be made up by equity. The lender must verify the financial information the appraiser relied on against the seller's IRS transcripts. For acquisitions with a purchase price of $3 million or more, the lender must also obtain a quality-of-earnings report with a cash proof that reconciles the bank statements to the income statement and the tax return for the trailing twelve months and the last two fiscal years, and must use that report's earnings in the coverage test. And the coverage test itself is 1.25 to 1 for an initial acquisition, on the last fiscal year or the average of the last two, with the buyer putting in at least 10 percent equity, half of it from unborrowed cash.

Read as an owner, that is one instruction: value the business on what the tax returns and bank statements can prove. An add-back the transcripts cannot support, a cash sale that never reached a deposit, or a 2026 that is running well ahead of 2025 on an internal P&L nobody has reconciled will not survive the appraiser, the cash proof or the coverage test, and the price moves at the bank rather than at the table. The five things a buyer's accountant finds first are in what buyers look for, and the documents that prove the earnings are in the documents needed to sell a business.

A worked example: a DuPage County distributor, three methods reconciled

The company is hypothetical and the assumptions are stated so you can swap in your own. A wholesale distributor in Carol Stream does $4.2 million in revenue. The federal return shows $310,000 of pre-tax profit after the owner's $160,000 salary, $45,000 of depreciation, $12,000 of interest, an $18,000 one-time legal settlement and $9,000 of personal vehicle expense. Rebuilt, SDE is $554,000. Reported EBITDA, the number the lender tests first, is $367,000 before any add-back, and about $414,000 once a general manager at $140,000 loaded replaces the owner.

Market approach: BizBuySell's wholesale-distribution benchmark (businesses sold 2021 to 2025) runs 2.0 to 3.4 times SDE with a median of 2.7, which puts the raw range at $1.11 million to $1.88 million and the median at about $1.50 million. Market Pulse prices a deal of that size, $1 million to $2 million, at 3.0 times SDE, about $1.66 million. On the EBITDA view, the distribution sector's 3.6 times median (BVR DealStats Value Index, Q1 2025) on $414,000 is $1.49 million. Three readings between $1.49 million and $1.66 million; the working number is $1.5 million, and the five tests decide whether it sits above or below that.

Income approach, as the bank runs it: at $1.5 million, the buyer injects $150,000 and borrows $1.35 million. Over ten years at an assumed 10 percent rate the annual payment is about $214,000. Historical EBITDA of $367,000 divided by $214,000 is 1.71 times, comfortably over 1.25, so the price finances. Run the other way, the same earnings would carry a loan of about $1.85 million at exactly 1.25 times, so the lender's test is not the constraint here; the comparables are. That is the usual outcome for a distributor with documented earnings. It reverses for a company with $554,000 of SDE on paper and $300,000 of it in add-backs the transcripts cannot support, because the appraiser and the cash proof take the price down to what they can see.

Asset approach: equipment, racking and vehicles at fair market value $220,000, inventory at cost $380,000, for $600,000 of tangible assets conveyed. The floor is well under the earnings value, which confirms the company is worth its earnings and not its assets, and the Form 8594 allocation on a $1.5 million price is about $600,000 of hard assets and $900,000 of goodwill. Receivables and payables are settled at closing against a working-capital target agreed in the letter of intent, which is its own negotiation and the subject of seller financing and earnouts in Chicago deals.

Do I need help to value my business?

Not to get to a range. The five steps above and the two linked pages will put most owners inside a range a buyer's accountant would recognize, provided the earnings are rebuilt from the return and not from memory. You need help when the add-backs are large or contested, when the company is near the $2 million line where SDE gives way to EBITDA, when the assets may exceed the earnings value, or when the sale is to a family member, a partner or an employee and the price has to hold up to a lender and to the IRS. Lakeshore's confidential value range is free and takes revenue, industry and an email; within two business days you have a CPA-prepared low and high and the two or three items an appraiser would raise first. Where the fixes are structural, the Exit-Readiness Review rebuilds SDE from the add-backs up over two weeks for a flat $4,500, credited against our success fee if we later list the business. For an estate, a divorce or a partner dispute you need a certified appraisal from a credentialed appraiser, which is a different product, and we will say so.