Last updated: March 2025
Quick Answer
To value a business using the multiples method, multiply the annual earnings (usually EBITDA or Seller's Discretionary Earnings) by an industry-standard multiple. To find the actual take-home value for the owners (Equity Value), add any cash in the business and subtract any outstanding debt.
Key Takeaways
- ✓ Enterprise Value vs Equity Value: Enterprise value is the total value of the operations. Equity value is what the current owners actually get to keep after settling the balance sheet (paying off lenders).
- ✓ Growth influences the multiple: Businesses growing at 30% year-over-year will command a significantly higher multiple than businesses growing at 2% year-over-year in the same industry.
- ✓ Cash-free, Debt-free: Most M&A (Mergers and Acquisitions) transactions are executed on a "cash-free, debt-free" basis, meaning the seller keeps the cash but must pay off the debt.
How to Increase Your Business Valuation
Valuation isn't just a math formula; it's a reflection of risk. Buyers pay higher multiples for businesses that have lower risk profiles. The key ways to increase your multiple include:
- Recurring Revenue: $1 of subscription revenue is worth far more to a buyer than $1 of one-off project revenue.
- Owner Independence: If the business cannot run without the founder, it's virtually unsellable. You must build a management team so the business operates without you.
- Customer Concentration: If single customer accounts for 30% of your revenue, buyers will heavily discount your valuation due to the high risk.
Frequently Asked Questions
What is a business valuation multiple?
A multiple relies on the idea that similar businesses sell for similar prices relative to their earnings. If comparable businesses in your industry sell for 3x their EBITDA, then your multiple is 3.
What is SDE vs EBITDA?
Seller’s Discretionary Earnings (SDE) is typically used to value small businesses (under $1M revenue) where the owner is the primary operator. It adds back the owner’s salary. EBITDA is used for larger, established businesses.
How do you calculate business valuation using earnings multiples?
Multiply your chosen earnings metric (usually EBITDA or Pre-Tax Profit) by an industry-specific multiple. You then adjust for any cash on hand and outstanding debts to find the exact equity value.