How to Value and Sell Your Small Business: Exit Planning Basics

Estimated read time: 13 minutes

Most small business owners find out what their company is worth at the worst possible moment: when they are tired, when a health scare has forced the question, or when a buyer has already made an offer and they have no idea whether it is good. By then the leverage is gone. The valuation is what it is, and the twelve to twenty-four months of work that could have raised it are no longer available.

Exit planning has an image problem. It sounds like something for companies with boards and investment bankers. In reality it is a set of fairly ordinary bookkeeping and operational habits that happen to raise your sale price by a large multiple, and that make your business better to run in the meantime whether you ever sell or not.

This is the practical version. How buyers actually calculate what your business is worth, what moves the number, what the process looks like, and where owners routinely leave money on the table.

TL;DR

• Small businesses are valued on seller’s discretionary earnings (SDE), not revenue. SDE is net profit plus your salary, plus personal expenses run through the business, plus interest, taxes, depreciation and amortization, plus genuine one-time costs.
• Most main-street businesses sell for roughly 2 to 4 times SDE. Larger or more systematized businesses valued on EBITDA can reach 4 to 6 times or more.
• The single biggest multiple killer is owner dependence. If the business cannot run without you, you are selling a job, and jobs trade at a discount.
• Clean books are worth real money. Buyers discount what they cannot verify, and personal spending mixed into business accounts creates exactly that problem.
• Customer concentration matters enormously. One client at 40 percent of revenue can cut a multiple in half.
• Expect the process to take 6 to 12 months from listing to close, and start preparing 18 to 24 months before you want to be out.
• Deal structure decides how much you actually receive. All-cash is rare; earnouts and seller financing are common and carry real risk.

The number buyers actually use

Owners tend to think in revenue. Buyers think in earnings, and specifically in a figure called seller’s discretionary earnings.

SDE exists because small business tax returns systematically understate profitability on purpose. You pay yourself a salary. You run a vehicle through the company. Your accountant found some legitimate deductions. All of that lowers taxable income, which is exactly what it is meant to do, and it also makes the business look less profitable than it is to an incoming owner who will make different choices.

So SDE adds those things back. The calculation is:

• Net profit as reported
• Plus one owner’s total compensation, including benefits
• Plus interest expense
• Plus taxes
• Plus depreciation and amortization
• Plus personal or discretionary expenses that a new owner would not incur
• Plus genuinely non-recurring costs, such as a one-time legal settlement or a flood repair

A worked example. Your landscaping company reports $780,000 in revenue and $52,000 in net profit. That looks thin. But you paid yourself $95,000, the company carries $6,000 in interest on a truck loan, depreciation ran $28,000, and roughly $14,000 of what flows through the business is personal: your phone, a family vehicle, some travel that was mostly a vacation. SDE comes to about $195,000. At a 3x multiple that is a business worth roughly $585,000, not the $150,000-ish someone might guess from the profit line.

Two cautions. First, add-backs must be defensible. A buyer’s accountant will challenge every one, and a padded SDE that collapses under scrutiny does more damage to your credibility than the dollars were worth. Second, if the business needs two owners working full time, only one owner’s compensation gets added back. The second one is a real salary the buyer has to pay.

Above roughly $1 million to $2 million in earnings, buyers usually shift to EBITDA, which does not add back owner compensation because at that size the business is expected to pay a market-rate manager. That transition is a big deal and it is one reason larger businesses command higher multiples: they are being measured on a stricter basis and still performing.

What sets your multiple

Two businesses with identical SDE can sell for very different amounts. The multiple is the market’s judgment about how risky and how transferable your earnings are.

Industry. Recurring-revenue software and service businesses trade highest. Professional services with credentialed, transferable relationships do well. Restaurants and retail trade lowest, because margins are thin and failure rates are high. You cannot change your industry, but you should know where you sit before you form expectations.

Size. Bigger businesses get bigger multiples for the same earnings quality. A business with $200,000 in SDE is competing for individual buyers using an SBA loan. A business with $1.5 million in EBITDA is competing for private equity and strategic acquirers with more capital and more patience. More buyers means more competition means a higher price.

Growth trend. Three years of steady growth supports a premium. Flat is acceptable. Declining is brutal, because the buyer is pricing the trend forward, not the current year. If revenue has slipped, either fix it before selling or accept that you will be negotiating against your own chart.

Transferability. This is the one owners underrate most. Can the business run without you? Are the customer relationships with the company or with you personally? Are processes documented, or do they live in your head? Every answer that points back at you personally comes out of the multiple.

Three valuation methods, and when each applies

Earnings multiple. SDE or EBITDA times a market multiple. This is how the overwhelming majority of small business sales are priced, and it is where you should start.

Asset-based. The value of equipment, inventory, real estate and receivables, minus liabilities. This matters when the business is asset-heavy, or when earnings are weak enough that the assets are worth more than the operation. If your asset value exceeds your earnings value, that is a signal worth sitting with.

Market comparables. What similar businesses in your industry and region actually sold for. Business brokers subscribe to transaction databases for exactly this. Public marketplace listings are a rough proxy, but be careful: listing prices are asks, not closes, and the gap between them is often wide.

A serious valuation uses all three and reconciles them. If they disagree sharply, that disagreement is itself information about where your risk sits.

Nine things that raise your valuation

Ranked roughly by return on effort.

1. Make yourself replaceable. Hire or promote someone who runs daily operations. Move customer relationships onto the company. This is the highest-leverage change available and it takes the longest, which is why it has to start early.
2. Clean up the books. Three years of accrual-basis financials that reconcile to your tax returns. Separate business and personal spending completely, starting now. Every dollar a buyer cannot verify is a dollar they discount.
3. Reduce customer concentration. If one client is more than 20 percent of revenue, that is a flag. Over 40 percent and many buyers walk. Diversifying takes time, which is another argument for a long runway.
4. Convert revenue to recurring. Maintenance contracts, retainers, subscriptions and service agreements are valued far above one-off project work, because they are predictable.
5. Document your processes. Written procedures for the things that only you know how to do. This is tedious and it directly converts into price, because it is the proof that the business is transferable.
6. Lock down your contracts. Signed customer agreements, an assignable lease, employment agreements with key staff, and clear ownership of your intellectual property, domains and accounts.
7. Fix the obvious operational mess. Old inventory, uncollected receivables, deferred maintenance, unresolved disputes. Buyers price visible problems pessimistically.
8. Show a clean growth story. If you are going to invest in growth, do it early enough that the results appear in the three years of financials a buyer will examine.
9. Get a professional valuation before you list. A few thousand dollars for an accurate number beats a year of negotiating against an anchor you invented.

What kills deals

A large share of small business sales fall apart after an offer is accepted. The usual causes are predictable and mostly preventable.

Financials that do not survive due diligence. The seller’s numbers and the verifiable numbers diverge, and trust evaporates. This is the most common deal killer and it is entirely a bookkeeping problem.

Undisclosed problems surfacing late. A pending lawsuit, a lease that cannot be assigned, a key employee who has already resigned, an unpaid tax liability. Disclose early. A problem raised on day one is a negotiating point. The same problem discovered in week ten is a betrayal.

Financing falling through. Most small business acquisitions run on SBA loans, and the lender does its own underwriting on the business, not just the buyer. Qualify your buyer’s financing early rather than discovering the problem in month five.

Performance sagging during the process. Selling is exhausting and distracting, and a business that softens mid-diligence invites a renegotiated price. Assume the process will consume a meaningful share of your attention and plan coverage for the rest.

Seller’s remorse. More common than people admit. Owners get to the closing table and realize they have no idea who they are without the business. Decide what you are retiring to, not just what you are retiring from, before you start.

The sale process, step by step

1. Preparation, 12 to 24 months. Everything in the list above. This is where the money is made.

2. Valuation and assembling the package. A professional valuation, three years of financials, tax returns, a summary of operations, customer and revenue breakdowns, and a written narrative of why the business is worth what you are asking.

3. Going to market, 1 to 6 months. A blind listing that describes the business without identifying it, so employees, customers and competitors do not find out. Interested parties sign a non-disclosure agreement before receiving details.

4. Buyer meetings and offers. Serious buyers submit a letter of intent with a price and structure. It is generally non-binding except for exclusivity and confidentiality clauses, which are binding and which you should read carefully.

5. Due diligence, 30 to 90 days. The buyer verifies everything. Financials, contracts, legal exposure, employee records, systems. This is intense and intrusive and it is normal.

6. Purchase agreement and close. Lawyers document the deal. Representations, warranties, indemnities and non-compete terms are negotiated here, and they matter as much as the price.

7. Transition, 30 days to 12 months. Most deals require you to stay on to hand over relationships and knowledge. Negotiate the length and the compensation explicitly rather than leaving it vague.

Broker, marketplace, or on your own

A business broker typically charges 8 to 12 percent of the sale price for businesses under roughly $1 million, with the percentage declining as the price rises. You are buying buyer access, confidentiality management, negotiation experience and, crucially, someone whose job is to keep the deal moving while you run the company. For most owners selling once in a lifetime, this is worth it. Interview several, ask for recent comparable closings in your industry, and read the exclusivity term carefully.

Online marketplaces cost a few hundred dollars to list and give you direct reach. They work best for smaller, simpler businesses, and for online businesses where the buyer pool is already accustomed to shopping that way. Expect to do your own screening, and expect a meaningful share of inquiries to be unqualified.

Selling on your own makes sense when you already have the buyer: an employee, a competitor who has expressed interest, a family member. You still need a transaction attorney and an accountant. Saving the broker fee by skipping legal review is the expensive kind of thrift.

Whichever route you take, get a transaction attorney. Not your general business lawyer, and not a template. The purchase agreement is where your actual exposure is decided.

Deal structure is half the price

A $900,000 offer with 40 percent contingent on future performance is not a $900,000 offer. Structure determines what you actually receive and when.

Cash at close is the only truly certain money. All-cash deals happen but are less common than owners expect, and buyers often discount the price in exchange for the certainty they are giving you.

Seller financing means you carry a note for part of the price, commonly 10 to 30 percent. SBA lenders frequently require some seller financing precisely because it keeps you invested in a smooth handover. Secure the note properly, because an unsecured note against a business someone else now controls is a thin promise.

Earnouts pay you more if the business hits agreed targets after the sale. They bridge disagreements about value, and they are also where sellers most often get hurt, because the person controlling whether the target gets hit is no longer you. If you accept an earnout, negotiate the definitions in detail, insist on reporting rights, and mentally treat the earnout as a bonus rather than part of the price.

Asset sale versus stock sale is a tax question with large consequences. Buyers usually prefer asset sales for the depreciation step-up and the liability protection; sellers often prefer stock sales for the capital gains treatment. Get this modeled by a tax professional before you agree to anything, because the difference can be a six-figure swing on a mid-sized deal.

Also negotiate the non-compete deliberately. A clause that is too broad in geography or duration can prevent you from working in the only field you know.

A realistic two-year timeline

Months 1 to 6. Separate personal and business finances completely. Move to clean accrual accounting. Get a baseline valuation so you know your starting point. Begin documenting processes.

Months 7 to 12. Hire or promote an operations lead. Start transferring customer relationships. Work on customer concentration. Convert what you can to recurring revenue.

Months 13 to 18. Step back from daily operations deliberately and see what breaks, because whatever breaks is what a buyer will find. Clean up contracts, leases and intellectual property ownership. Resolve outstanding disputes.

Months 19 to 24. Updated valuation. Assemble the package. Interview brokers. Go to market.

If you do not have two years, do it anyway on a compressed schedule. Even six months of clean books and reduced owner dependence changes the conversation. And if you are earlier than that, the useful reframe is that everything on this list is also just good business hygiene. Documented processes, diversified customers, clean financials and a business that survives your absence are worth having whether or not anyone ever buys the thing.

Frequently asked questions

How much is my business worth if it makes $150,000 a year?

If $150,000 is SDE rather than revenue, a typical range is roughly $300,000 to $600,000 depending on industry, growth, customer concentration and how dependent the business is on you. If $150,000 is revenue, the earnings figure is what matters and the answer will be much lower.

Do I need a formal valuation, or can I estimate?

Estimate early to set direction, then get a formal valuation before you list. A professional valuation gives you a defensible number backed by real comparable transactions, which is a far stronger negotiating position than an asking price you reasoned your way to.

Should I tell my employees I am selling?

Generally not until a deal is well advanced and reasonably certain. Early disclosure causes departures, and departures reduce the value of the thing you are selling. The usual exception is a key manager whose cooperation you need, who may warrant an early conversation and a retention agreement.

What if my business depends entirely on me?

It is still sellable, at a lower multiple and often with a longer transition period and a larger earnout. If you have time, this is the single most valuable thing to fix. If you do not, price it honestly and expect buyers to structure around the risk.

How long does it actually take to sell?

Six to twelve months from listing to close is typical for a well-prepared small business. Poorly prepared businesses take considerably longer or do not sell at all. Preparation before listing should add another twelve to twenty-four months if you want the best outcome.

Can I sell if I have business debt?

Yes. Debt is usually paid off from the proceeds at closing, so what matters is that the sale price exceeds what you owe. Disclose all obligations early, including any personal guarantees, because they will surface in diligence regardless.

This article is general information, not legal, tax or financial advice. Valuation and deal structure have significant tax consequences that depend on your specific situation. Work with a transaction attorney and a tax professional before signing anything.

Related Coverage

• Best Bookkeeping Services for Small Business: clean books are the highest-return preparation you can do, and this is how to get them.
• How to Set Up an LLC in 30 Minutes: entity structure affects how a sale is taxed, so it is worth getting right early.
• Best Invoice Factoring and Cash Flow Financing: for owners who need liquidity now rather than an exit.

Faceted Media Magazine covers business, AI, and entrepreneurship for the people building what’s next.