An asking price is a marketing number. Value is what the verified earnings, the risk in those earnings, and what similar businesses actually sold for can support. First-time buyers who skip that distinction pay for a story that will not service the loan.
This page is a buyer-side map of how small operating companies get valued before an offer: SDE multiples on Main Street deals, EBITDA when the company is larger, the three approaches SBA lists for owners who sell, what usually moves a multiple up or down, and when a formal appraisal is worth the invoice. Pair it with how to judge business numbers before an offer (prove the earnings) and the affordability calculator (prove you can fund the price). Diligence after the LOI is a different job; see what due diligence actually involves.
Short version: rebuild seller's discretionary earnings (or adjusted EBITDA on bigger deals), sanity-check the multiple against recent closed sales in the same size band, and only then decide what you will offer. Asking price is the seller's opening bid, not the appraisal.
Know your price band before you argue about theirs
Two minutes on the assessment is a cheap filter on capital and owner type. Valuation work is expensive when you do it on deals your cash cannot support.
Take the assessment →SDE multiples on Main Street deals
Most small, owner-operated businesses change hands on a multiple of seller's discretionary earnings. The IBBA glossary defines Discretionary Earnings as earnings of the business before income taxes; non-operating income and expenses; nonrecurring income and expenses; depreciation and amortization; interest income or expense; and one owner's entire compensation (and related expenses). In plain English: what one full-time owner-operator can take out before they pay themselves a market wage.
Market multiples are not invented in a vacuum. BizBuySell's Q3 2026 Insight Report (current report at that rolling URL) reported that businesses sold under $1 million had a median cash flow of $123,000, a median sale price of $250,000, and an average cash-flow multiple of 2.30. BizBuySell's industry valuation multiples table, based on reported sales from Q3 2021 through Q2 2026, puts the all-sector average at 2.58, with sector averages in that table from about 2.0 to a little over 3.3. Those are closed-sale snapshots, not a promise your target prints the same number.
So if you have verified $100,000 of SDE, a 2.3x to 2.6x neighborhood points to a purchase price often in the low-to-mid $200,000s. Concentration, owner dependence, lease risk and growth can push you outside that band. Our page on what a $100k cash-flow business really costs walks the debt-service math after that price.
When EBITDA takes over
IBBA defines EBITDA as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA goes further: it starts from that idea, strips non-operating and nonrecurring items, and typically inserts a market-rate manager salary instead of treating owner pay as free cash. Once a business already pays a real manager, or once institutional buyers and larger lenders dominate the process, SDE multiples stop being the common language.
BizBuySell's Q3 2026 report also shows how size changes the multiple. Above a $1 million sale price, the average cash-flow multiple in that report was 3.73, compared with 2.30 below that line. Larger deals often trade on EBITDA (or adjusted EBITDA) and a different buyer set. If a broker quotes an "EBITDA multiple" on a shop that still pays the owner through the P&L with no manager line, ask them to rebuild the number both ways. Paying an SDE multiple on an EBITDA figure, or the reverse, is a quiet way to overpay.
Three approaches SBA lists for sellers (buyers should know them too)
SBA's guidance for owners who close or sell a business tells sellers to use business valuation to set a monetary value before marketing, and it names three common methods:
- Income approach. Looks at projected revenue and accounts for potential risks.
- Market approach. Compares your business to other similar businesses that have recently sold.
- Assets approach. Subtracts total business liabilities from the total value of all assets.
On a going Main Street company, buyers usually live in the income and market worlds: capitalized or multiplied earnings, checked against comps. The asset approach matters more when earnings are thin, the company is mostly equipment and inventory, or you are thinking about liquidation value. IBBA's glossary describes an Asset Approach where assets and liabilities (including off-balance sheet, intangible and contingent items) are adjusted to fair market values. That is appraisal language, not a napkin multiple.
SBA also points sellers to The Appraisal Foundation for resources on valuation appraisals. When a lender, partner or court needs an independent opinion, that is the lane you are in. A broker opinion of value is useful market color. It is not the same product.
What usually pushes a multiple up or down
Two businesses with the same verified SDE can sell for very different prices. Quality and transferability do most of the work.
Things that often support a higher multiple:
- Recurring or contracted revenue that survives a new owner
- Documented systems and a manager or lead who already runs the day
- Diversified customers rather than one account that is half of sales
- A lease with remaining term and assignment terms a buyer can live with
- Clean books that reconcile to tax returns and bank deposits
- Growth that shows up in filed returns, not only in a forecast slide
Things that usually pull the multiple down:
- Heavy owner dependence (the seller is the product)
- Customer or vendor concentration without contracts
- Messy add-backs, cash that never hit the return, or refusing transcripts
- A short or non-assignable lease in a location-dependent business
- Key-person licenses that do not transfer on a realistic timeline
- Declining revenue that the CIM tries to talk past
None of those is a moral judgment. Each one changes how much cash flow you can count on after closing, which is what a multiple is trying to price.
Working capital and inventory are part of the price conversation
IBBA defines working capital as the excess of current assets over current liabilities. In a purchase, buyers care about the level of working capital that comes with the business on day one: cash, receivables, inventory and payables in a normal operating shape. A headline price that assumes a stripped balance sheet is not the same deal as a price that includes a normal working-capital peg.
Inventory deserves its own look. Count it. Age it. Separate what turns from what has been sitting since the prior owner's optimism. On an asset sale, the IRS explains that a lump-sum sale of a trade or business is treated as a sale of each asset, with both parties allocating consideration under the residual method in many cases (see the IRS page on the sale of a business and Publication 544). How inventory and other assets get valued in that allocation affects taxes for both sides. It also affects what you are actually paying for when the seller waves at "about $80k of stock."
Write the working-capital target into the letter of intent or purchase agreement so closing is not a surprise about empty shelves.
Why the asking price is not value
Sellers often anchor on retirement needs, a neighbor's claimed price, or a portal estimate. Brokers sometimes list high to win the listing. Buyers who treat the ask as sacred either overpay or walk from deals that would have worked at a real multiple.
Value, for a financed buyer, also has a hard ceiling: what verified earnings will cover after debt service and a living draw. That is why the affordability calculator sits next to any multiple talk. A high ask on thin SDE can look cheap on a spreadsheet and still fail coverage.
Price the cash flow you can defend. Then see if the ask is in the same zip code.
When to pay for a formal valuation
You do not need a bound appraisal for every coffee-shop offer. You should budget for independent valuation work when:
- Your lender requires it under SBA or bank policy for the size or structure of the deal
- Partners, a trust, an ESOP, or a divorce-adjacent sale need a defensible number
- Hard assets, real estate and goodwill are tangled and the allocation will drive tax results
- You and the seller are far apart and a third-party opinion is the only way to keep talking
- You are buying a minority interest or a complex equity structure rather than 100% of a simple asset deal
SBA's sell-your-business page pairs valuation with advice from a lawyer and a business evaluation expert, plus accountants and bankers. A formal valuation does not replace diligence on customers, the lease or the people. It answers a different question: what supportable value follows from a stated standard and set of assumptions.
Check readiness while you pressure-test the multiple
If capital, timing or owner type are still fuzzy, fix that before you pay for comps or an appraisal on a business that never fit.
Take the assessment →Common questions
What multiple should I use to value a small business?
For many Main Street deals, buyers and brokers talk in seller's discretionary earnings (SDE) multiples. BizBuySell's Q3 2026 Insight Report put the average cash-flow multiple at 2.30 for businesses that sold under $1 million. That is a market snapshot, not a rule for your deal. Verify earnings first, then compare comps in the same size and industry band.
When should I use EBITDA instead of SDE?
Use SDE when one working owner still takes most of the benefit home. Shift toward adjusted EBITDA when the business already pays a market-rate manager, or when size and institutional buyers make owner-add-back math less relevant. Mixing the two without saying which one you priced is how offers go sideways.
Is the asking price the same as fair value?
No. An asking price is a seller's opening number. Value is what verified earnings, risk, and comparable sales support, and what a buyer can fund. Some listings sit well above closed multiples; some quiet deals sit below. Price the business, not the teaser.
Do I need a formal appraisal before every offer?
Not for every small cash deal. You do want a formal valuation when a lender requires one, when partners or a trust need an independent number, when the business mixes hard assets and goodwill in a messy way, or when you and the seller are far apart and need a third-party bridge. SBA points sellers to Appraisal Foundation resources when they want appraisal-grade work.