What Is My Business Worth? A Plain-English Guide to Business Valuation

It's the first question every owner asks when they start thinking about selling — and the one most likely to produce a number that surprises them, in either direction.

Business valuation is not a mystery. It follows a logic, and once you understand that logic, you can use it to your advantage: to know whether now is the right time to sell, to identify what's holding your value back, and to walk into a negotiation with a number you can defend.

Here's how it works.

Buyers don't buy revenue. They don't buy assets. They buy cash flow — specifically, the cash flow available to the owner after the business pays its bills.

For most small and mid-sized businesses, that number is called Seller's Discretionary Earnings (SDE). For larger businesses — typically those generating $1M or more in earnings — buyers use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Both metrics start with net profit and add back expenses that are specific to the current owner and won't necessarily continue under new ownership.

Add-backs are the adjustments that turn your tax return into a true picture of what the business earns. Common add-backs include:

• Owner's salary and benefits — what you pay yourself, including health insurance, retirement contributions, and any personal vehicle or phone expenses run through the business
• One-time or non-recurring expenses — a legal dispute you settled, a piece of equipment you replaced, a one-time marketing campaign
• Personal expenses run through the business — travel, meals, entertainment, or other costs that are legitimately personal but expensed to the company
• Depreciation and amortization — non-cash accounting charges that reduce taxable income but don't represent actual cash leaving the business
• Interest expense — debt service that won't transfer to the buyer

Every add-back must be documented. Undocumented add-backs are just claims, and buyers discount claims. The cleaner your books and the more clearly you can support each adjustment, the more credible your SDE — and the stronger your negotiating position. For a deeper look at exactly where add-backs live on your tax return, see How to Find Add-Backs on a Tax Return.

Once you have a defensible SDE or EBITDA, you multiply it by an industry-specific multiple to arrive at a business value.

For Main Street businesses (under $1M in SDE), multiples typically range from 2x to 4x SDE. For lower middle market businesses ($1M–$5M EBITDA), multiples commonly range from 3x to 6x EBITDA or higher, depending on the business.

The multiple is not fixed — it's a reflection of risk and desirability. Businesses that command higher multiples share certain characteristics:

Recurring revenue. Subscription models, long-term contracts, and repeat customers reduce buyer risk and justify a premium.

Low owner dependency. A business that runs without the owner present is worth more than one that falls apart when the owner takes a vacation. Documented systems, trained management, and transferable relationships all push the multiple up.

Revenue growth. A business growing 15% year over year is worth more than a flat one, even at the same current earnings level. Buyers are paying for the future, not just the present.

Customer diversification. No single customer representing more than 10–15% of revenue is a strong signal. High concentration is a risk that buyers price in.

Clean financials. Three years of tax returns that match your P&L, with clearly documented add-backs, removes friction and doubt from the process.

Strong lease terms. For location-dependent businesses, a long lease with favorable transfer provisions is a real asset. A short lease with an uncooperative landlord is a liability.

Just as certain factors command a premium, others compress the multiple — or make a business difficult to sell at any price.

• Declining revenue — even if current earnings are strong, a downward trend raises questions about sustainability
• Deferred maintenance — equipment, technology, or facilities that need significant investment post-sale
• Pending litigation or regulatory issues — these create contingent liabilities that buyers price conservatively
• Key-person risk — if the business depends entirely on the owner's relationships or skills, buyers face real transition risk
• Undocumented cash — unreported income can't be added back, and attempting to do so creates legal exposure for both parties
• Lease issues — short remaining term, personal guarantee requirements, or a landlord who won't cooperate on transfer

Say you own a service business on Long Island. Your tax return shows $180,000 in net profit. But you also pay yourself a $120,000 salary, run $20,000 in personal vehicle expenses through the business, and had a one-time $15,000 legal expense last year.

Your SDE: $180,000 + $120,000 + $20,000 + $15,000 = $335,000

At a 3x multiple, your business is worth approximately $1,005,000. At 3.5x, it's $1,172,500. That half-turn difference in multiple — driven by factors like owner dependency, lease terms, and revenue trends — is worth $167,500.

This is why preparation matters. The work you do before you sell — reducing owner dependency, cleaning up the books, locking in a favorable lease renewal — directly translates into a higher multiple and a higher price. For a full preparation checklist, see How to Prepare to Sell Your Business.

Most operating businesses are valued on cash flow, not assets. But for businesses with significant tangible assets — real estate, heavy equipment, inventory — an asset-based approach may be relevant as a floor or as a component of the total value.

If your business owns its real estate, that real estate is typically valued separately and either included in the sale or structured as a lease-back arrangement. This is common in manufacturing, industrial, and certain retail transactions.

A few common misconceptions worth addressing directly:

It's not worth what you need for retirement. What you need and what the market will pay are two different numbers. If there's a gap, the answer is to either improve the business or adjust your timeline — not to overprice and sit on the market.

It's not worth what your neighbor got. Every business is different. Industry, geography, size, growth profile, and owner dependency all affect value. Comparable sales are useful data points, but they're not your number.

It's not worth more because you've worked hard. Buyers pay for cash flow and risk, not effort. The years you put in are reflected in what you've built — not added on top of it.

The only way to know what your business is actually worth is to have someone who does this every day look at your real numbers — not a formula, not a rule of thumb, not a website calculator.

VTG Business Advisors provides confidential business valuations grounded in current market data and comparable transactions. We'll give you an honest number, explain exactly how we got there, and tell you what — if anything — you could do to improve it before going to market.

There's no obligation and no cost for the initial conversation.

Curious what your business is worth in today's market?

Schedule a free, confidential valuation with VTG Business Advisors. We serve business owners across Long Island, New York, and beyond.