How to Value a Business: Methods, Multiples, and What Drives Price
Key takeaways
- •Value is usually a multiple of normalized earnings (SDE or adjusted EBITDA), not revenue.
- •Three methods — market multiples, DCF, and asset-based — are cross-checked, not used in isolation.
- •Two businesses with identical earnings can sell for very different prices based on risk and transferability.
- •Most value is created before you go to market, by reducing owner dependence and cleaning up earnings.
Value starts with normalized earnings
Before any multiple is applied, an advisor normalizes your earnings — recasting the financials to show a buyer's true economic benefit. That means adding back owner salary above market, personal expenses run through the business, one-time costs, and non-recurring items.
For smaller owner-operated businesses, the relevant figure is usually Seller's Discretionary Earnings (SDE). For larger businesses with a management team, it's adjusted EBITDA. Getting this number right is the single most important step in any valuation.
The three methods
A credible valuation triangulates across three approaches rather than relying on one.
- Market multiples: apply a multiple from comparable Canadian transactions in your sector and size to your normalized earnings. This is the most common method for owner-operated businesses.
- Discounted cash flow (DCF): project future cash flows and discount them to present value for risk. Strategic and financial buyers use this to justify paying a premium.
- Asset-based: total the fair value of tangible and intangible assets. This sets a floor, and matters most for asset-heavy or real-estate-anchored businesses.
Why multiples vary so much
Multiples are not fixed by industry — they're a measure of risk. A higher multiple says a buyer believes the earnings are durable and transferable; a lower multiple says the opposite.
That's why a recurring-revenue software business and a single-location restaurant with the same earnings sell at very different prices. The software's revenue is contracted and the owner is replaceable; the restaurant's success may walk out the door with the owner.
The value drivers you control
If you want a higher multiple, work on the factors that reduce a buyer's perceived risk before you sell.
- Reduce owner dependence so the business runs without you.
- Build recurring or contracted revenue.
- Diversify the customer base to cut concentration risk.
- Document clean, consistent, normalized financials.
- Secure a long, assignable lease and key supplier terms.
- Develop a management layer that will stay through transition.
Frequently asked questions
About the author
Ali Sedighi, MBA, is the founder of BizSell.ca, a confidential business brokerage and M&A advisory serving British Columbia in five languages. He leads every engagement personally, from valuation through close.
This article is general information for business owners, not legal, tax, or financial advice. Rules and figures change — confirm specifics for your situation with a qualified professional.