How Much Is Your Business Worth? 5 Business Valuation Methods Explained

Meet the Example Business We’ll Value Five Ways

To show how business valuation works in practice, let’s use one fictional company throughout this article: Eastfield HVAC, a Connecticut-based residential and light commercial service business with $2.5 million in annual revenue, $400,000 in Seller’s Discretionary Earnings (SDE), $250,000 in EBITDA (earnings before interest, taxes, depreciation, and amortization), 12 years of operating history, and 8% annual growth.

By the end of this article, you’ll see this same business valued anywhere from $250,000 to $1.4 million, depending on which method is being used and what the potential buyer actually cares about.

Method 1: SDE Multiple (Most Common for Small Businesses)

For owner-operated businesses with revenue under roughly $5 million, SDE is usually the starting point because it measures the total financial benefit the business provides to the owner each year.

To calculate, start with net income, then layer on add-backs: interest, taxes, the owner’s compensation, personal expenses run through the business, one-time costs like legal fees, and non-cash expenses such as depreciation. The result is what a new working owner could realistically take home.

For service businesses like HVAC, plumbing, and electrical companies, SDE multiples typically range from 1.5x to 3.5x. Where a business lands inside that range often depends on factors like recurring revenue, owner dependence, clean financials, customer concentration, and whether the team and client relationships are likely to survive after a sale.

Eastfield HVAC’s 12-year history, 8% annual growth, and modest owner dependence support a 2.5x multiple.

$400,000 SDE × 2.5 = $1,000,000

What makes SDE important is that it reflects how many small business buyers think. They are not simply evaluating revenue or equipment, but how reliably the company’s income stream can continue after the owner exits.

Method 2: EBITDA

As businesses become larger and more operationally independent, buyers often shift from SDE to EBITDA.

The distinction: EBITDA assumes the company can eventually operate without the owner personally embedded in the business. Unlike SDE, it does not add back the owner’s salary because the assumption is that a professional manager would need to be paid market compensation. That’s why Eastfield’s EBITDA ($250,000) is lower than its SDE ($400,000).

In the lower middle market, HVAC and skilled-trades businesses often trade between 4x and 7x EBITDA, especially when private equity firms are involved in industry rollups. Eastfield sits at the smaller end of that market, but its recurring revenue and steady growth make it an appealing tuck-in for a larger acquirer, which supports a 5x multiple.

$250,000 × 5 = $1,250,000

At this point, the same company already carries a $250,000 valuation spread depending on which earnings metric the buyer prioritizes. That’s one of the first things many owners discover during a sale process: valuation is not a fixed truth. It is an interpretation of future earnings, operational risk, and the business’s transferability after ownership changes hands.

Method 3: Discounted Cash Flow (DCF)

The Discounted Cash Flow model ignores multiples entirely and asks one question: what is the present value of every dollar this business will produce in the future? It’s the most theoretically rigorous valuation approach, and it’s how many investors underwrite acquisitions.

You build a five-year forecast of free cash flow, apply a discount rate that reflects the risk of those cash flows, and add a terminal value for everything beyond year five. For small private businesses, discount rates typically land between 15% and 25% because smaller companies carry more operational risk than large public firms.

For Eastfield, projected cash flow growth combined with an 18% discount rate and 3% terminal growth assumption produces a valuation of approximately: $1,400,000

DCF models can be incredibly useful, but every output is downstream of the assumptions used to build them. Push the discount rate to 22%, and Eastfield’s valuation drops below $1.1 million. Simpler valuation models, like capitalization of earnings, use similar logic but with fewer long-term forecasting assumptions.

Method 4: Asset-Based Valuation

The asset-based approach values the business very differently. Instead of focusing on future earnings, it asks what the underlying assets are worth today. 

For Eastfield HVAC, that means roughly $300,000 in trucks, tools, equipment, and inventory, minus $50,000 in liabilities, resulting in a valuation of approximately: $250,000

What this method misses is goodwill: the intangible value created by customer relationships, recurring contracts, reputation, systems, and years of market presence. For profitable service businesses, those factors are often worth far more than the physical equipment sitting on the balance sheet.

Asset-based valuation matters most for asset-heavy businesses, where the real value lies in tangible assets rather than relationships or earnings: a real estate holding company, a manufacturer with significant machinery, or a trucking or equipment-rental firm. It also applies to distressed sales and otherwise serves as a floor no rational seller would go below. For a profitable, growing service company like Eastfield, this number is better understood as a floor than a realistic market price.

Method 5: Comparable Sales (Market Approach)

The market approach looks at what similar businesses have actually sold for in recent transactions. In many ways, it is the most intuitive valuation method because it mirrors how residential real estate is priced: buyers look for comparable businesses with similar size, geography, industry, and customer profiles.

Sources like the BizBuySell Insight Report, DealStats, and the IBA Market Database aggregate thousands of closed small-business sales each year and publish median valuation multiples by industry, size, and geography.

Recent HVAC transaction medians cluster around 0.45x to 0.65x revenue and 2.3x to 3.0x SDE. Applied to Eastfield, those ranges produce valuations of:

• Revenue multiple: $2.5M × 0.55 = $1,375,000
• SDE multiple from comps: $400K × 2.7 = $1,080,000

The numbers do not perfectly align, and that’s normal. Sophisticated buyers typically care more about earnings quality and cash flow than top-line revenue alone.

Why the Same Business Can Produce Radically Different Valuations

All five methods on the same business, on the same day:

The spread is striking, and almost all of it comes down to a single distinction: are you valuing the underlying assets, or the future earnings attached to them? The $250,000 asset-based figure is a floor, not a market price.

The other methods, all built on earnings or comparable sales, cluster between roughly $1.0 and $1.4 million, which is the range a buyer and seller would realistically negotiate within. And in practice, no buyer relies on a single method; they triangulate between SDE multiples, comparable transactions, and discounted cash flow before settling on a price.

Which Business Valuation Method Fits Your Situation?

If you are preparing to sell, SDE multiples and comparable sales usually matter most because they reflect how buyers and brokers actually price small businesses. Investors and lenders often place greater weight on DCF models and future cash flow assumptions. At the same time, estate planning, buy-sell agreements, divorce proceedings, and partner disputes typically require formal appraisals that combine multiple methods and comply with legal or IRS standards. For distressed or highly asset-intensive businesses, asset-based valuation may become the primary framework.

For many owners, an internal estimate is enough for planning. But once a valuation enters a financing package, court filing, tax return, or purchase agreement, professional valuation work becomes far more important.

When to Hire a Professional Valuator

A formal business valuation for a small business typically costs between $3,000 and $5,000 and can take several weeks to complete. More complex situations involving litigation, tax scrutiny, or layered ownership structures can push the cost higher. Business owners should generally look for professionals with credentials like CVA (Certified Valuation Analyst), ASA (Accredited Senior Appraiser), or ABV (Accredited in Business Valuation).

An informal estimate is often fine for early planning conversations. But the moment a number becomes part of a legal agreement, financing process, or tax filing, the quality and defensibility of that valuation starts to matter much more.

If you’re weighing how a sale fits your family’s broader financial picture, that’s the kind of conversation our team handles for private clients and families.

Business Value FAQs

Does business value include real estate I own?

Usually no. If the business operates out of a building you own personally or through a separate LLC, the real estate is valued separately. The operating company pays itself rent, which shows up as an expense (or an add-back if above market).

How does owner dependence affect the multiple?

Heavily. If you personally hold the customer relationships, technical knowledge, and sales pipeline, buyers typically discount the multiple by 20% to 40% or insist on a long earn-out. Documented systems and a working second-in-command are the fastest ways to lift the multiple.

How do I value a declining business?

Buyers look at the trend, not just the trailing twelve months. The multiple compresses: a service business that commanded 2.5x SDE while growing might sell at just 1.5x to 2.0x in decline. Honest framing of the cause matters more than the spreadsheet.

Can I value multiple locations together?

Yes, but smart buyers value each unit on its own contribution. A four-location HVAC company isn’t worth 4x a single location if two of them lose money. Segment financials before applying any multiple.

Who decides the “fair market value” of my business?

For tax purposes, the IRS does, using Revenue Ruling 59-60: the price a willing buyer and willing seller would agree on, both with reasonable knowledge and neither under compulsion. For a sale, the market decides on closing day. Everything before that is an estimate.

Your Next Step

A valuation tells you what a business may be worth today. The harder question is what you want it to be worth in five years and how a future sale fits into the broader financial picture for your family, retirement, and long-term wealth. If you’re thinking through those questions, our team would be happy to start the conversation.

This article is for informational purposes only and is not tax, legal, or investment advice. Ready to start a conversation? We’re here to help. Visit skyig.com/contact or call (860) 761-9700.

SKY Investment Group, LLC is an SEC registered investment advisor. Being registered with the SEC does not imply any specific level of skill or training.

Neither SKY Investment Group, LLC nor Aspen provide tax or legal advice—please contact a professional for advice in such matters.

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