What’s Your Business Worth? Understanding Valuation Methods in Main Street M&A
If you’re a business owner thinking about selling—or a buyer evaluating a potential acquisition—the first question that comes up is often the hardest to answer: What’s this business really worth?
In the Main Street M&A market (typically businesses valued under $5 million), valuation isn’t just about spreadsheets—it’s about understanding how buyers view risk, cash flow, and future potential. Here are the most common valuation methods used in this space, and how to know which one fits your business.
1. Seller’s Discretionary Earnings (SDE) Multiple
Best for: Owner-operated businesses with few shareholders or passive investors.
SDE is the most common method for valuing small businesses. It starts with net profit and adds back owner compensation, interest, depreciation, and non-recurring expenses—essentially showing how much cash the business generates for a single owner.
Typical multiples: 2.0x–3.5x SDE, depending on industry, location, and risk profile.
Fits businesses like:
Service firms (HVAC, landscaping, IT support)
Solo professional practices (law, accounting, consulting)
Retail and food service with stable cash flow
2. EBITDA Multiple
Best for: Businesses with multiple owners, managers, or institutional buyers.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a cleaner measure of operating performance, often used in deals involving private equity or strategic buyers.
Typical multiples: 4.0x–6.0x EBITDA in the lower middle market, but can vary widely.
Fits businesses like:
Multi-location service providers
B2B firms with recurring contracts
Companies with management teams in place
3. Asset-Based Valuation
Best for: Businesses with significant tangible assets but limited cash flow.
This method values the business based on the fair market value of its assets—equipment, inventory, real estate—minus liabilities. It’s often used when the business isn’t profitable or is being liquidated.
Fits businesses like:
Manufacturing or distribution firms
Asset-heavy service businesses (e.g., towing, trucking)
Businesses with real estate holdings
4. Discounted Cash Flow (DCF)
Best for: Businesses with predictable future earnings and growth potential.
DCF projects future cash flows and discounts them back to present value. It’s more complex and less common in Main Street deals, but useful for buyers who want to model long-term ROI.
Fits businesses like:
SaaS or subscription-based models
Niche service firms with strong growth
Businesses with long-term contracts
Which One Fits Your Business?
If you’re an owner-operator with steady income and clean books, SDE multiple is likely your best fit. If you’ve built a team, have recurring revenue, or are preparing for institutional interest, EBITDA may be more appropriate. And if you’re asset-heavy or winding down, asset-based valuation might be the way to go.
At Lomba, P.A., we help business owners and buyers navigate valuation, deal structuring, and legal due diligence—especially in the professional and business services sectors. Whether you’re preparing to sell or evaluating a target, understanding your valuation method is the first step toward a successful transaction.
Lomba, P.A. South Florida M&A | Business Law | Deal Structuring