How to value a small business from its earnings

What number do you start with?

Start with the cash the business produces in a year, after the costs of running it. Owners usually begin with seller's discretionary earnings: profit, plus the owner's pay above a market salary, plus personal and one-time costs, plus depreciation. If you already know that figure, use it. If you do not, build it from net profit and those add-backs. Do not use revenue. Revenue is not what a buyer can take home.

How do you turn earnings into a price?

Multiply the earnings by a low multiple and a high multiple. The Biz Checkout calculator starts the band at 2.5 times and 4 times, because that is a common planning band for owner-operated businesses. Those numbers are a starting point you can edit. They are not a promise of what your business will sell for, and they are not a count of closed deals.

Run the same math on your own figures at the exit value calculator. The range appears as soon as you enter earnings. The emailed report adds the add-back worksheet and a buyer-ready checklist.

What should you subtract before you treat the range as proceeds?

Subtract debt that has to be paid off at closing, and any broker or closing fee you expect to pay. A $600,000 price with $150,000 of debt and a fee is not $600,000 in the owner's pocket. Put the debt and the fee in as their own lines so the range and the proceeds do not get mixed up.

When is this range not enough?

It is a starting range, not an appraisal a lender will accept. An SBA lender will want an independent valuation before funding. Use the range to decide whether a sale is worth preparing for. Use an appraiser when you need a number you will defend in a negotiation or a loan file.