What Is a Business Valuation?

A business valuation is an estimate of what your business is worth to a buyer. That's it. No mystery, no black box. It takes your financial performance, adjusts for things that are specific to you as the owner, and produces a number that represents what a reasonable buyer should be willing to pay.

The catch: most owners already have a number in their head, and it's usually wrong. We see this constantly on Rejigg. Owners who built something real over 10 or 20 years tend to anchor on what the business means to them, not what it means to a buyer walking in cold. That gap between perceived value and market value is where deals fall apart before they even start.

This article breaks down how valuations actually work, which methods matter for small businesses, and how to get a realistic number before you go to market.

How Does a Business Valuation Work?

A valuation starts with your financials and ends with a price range. The process in between depends on which method you use, but they all try to answer the same question: what would a rational buyer pay for the future cash flow this business generates?

For businesses in the $1M to $30M range, the process usually looks like this. You take your earnings (typically SDE or EBITDA, which we'll explain below), adjust out anything that's personal to you, and multiply by a number that reflects how desirable your type of business is to buyers. The result is your estimated enterprise value.

There are three main approaches, and each one is useful in different situations.

The Three Main Valuation Methods

Multiples Method (the One That Matters Most)

For small and mid-size businesses, multiples are how almost every deal gets priced. A multiple is just a number you multiply your annual earnings by to get a valuation. If your business earns $500,000 a year and the multiple is 3x, your business is worth roughly $1.5 million.

The two earnings figures buyers care about are SDE and EBITDA. SDE stands for Seller's Discretionary Earnings. It's your profit plus your salary plus any personal expenses you run through the business. Think of it as "how much cash does this business actually throw off for the person who owns it." EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is similar but doesn't add back the owner's salary, so it's more common for larger businesses where the owner isn't doing everything.

Most businesses under $5M in revenue use SDE. Above that, EBITDA is more standard.

The multiple itself varies by industry, size, growth rate, and a dozen other factors. A small service business might trade at 2-3x SDE. A SaaS company with recurring revenue might command 5-8x. A well-run home services business with strong recurring contracts might land at 3-4x.

Discounted Cash Flow (DCF)

DCF tries to calculate what the business's future cash flows are worth in today's dollars. You project out earnings for five or ten years, then discount them back using a rate that accounts for risk.

It's a sound concept, but for most small businesses, it's more theoretical than practical. The projections rely on assumptions about future growth, and a buyer looking at a $3M plumbing company isn't building a DCF model in Excel. They're looking at trailing earnings and applying a multiple. DCF shows up more in private equity deals and larger transactions where there's enough data to make the projections credible.

Asset-Based Valuation

This method adds up the value of everything the business owns (equipment, inventory, real estate, vehicles) and subtracts what it owes. The result is the net asset value.

Asset-based valuations are useful when the business has significant physical assets, like a construction company with a fleet of excavators or a manufacturing shop with specialized CNC machines. They're less useful for service businesses where the real value is the customer base, the team, and the cash flow rather than physical stuff.

In practice, most buyers use asset value as a floor. They'll pay more than asset value if the business generates strong cash flow, but they won't pay less.

Why Multiples Matter Most for Small Businesses

Multiples dominate small business transactions because they're simple, market-based, and easy for both sides to understand. When a buyer sees "3.2x SDE," they can quickly do the math and compare it to other opportunities.

More importantly, multiples reflect real market data. They come from actual transactions: what buyers actually paid for similar businesses. That makes them more grounded than a projection-heavy DCF or a pure asset count.

Rejigg's free valuation tool uses real transaction multiples for your industry, adjusted for owner add-backs, to give you an estimate. It connects to QuickBooks so you don't have to build spreadsheets manually. The whole point is to give you a realistic starting number based on what businesses like yours actually sell for.

What Drives Multiples Up or Down?

Two businesses in the same industry with the same revenue can have very different multiples. Here's what moves the needle.

Things that push multiples higher:

• Recurring revenue (contracts, subscriptions, service agreements that renew)
• Customer diversification (no single customer accounts for more than 10-15% of revenue)
• Growth trajectory (consistent year-over-year growth in revenue and earnings)
• Strong management team that can run things without the owner
• Clean financials with a clear P&L and minimal personal expenses mixed in
• Documented processes and SOPs

Things that push multiples lower:

• Owner dependence (if the owner leaves, do the customers leave too?)
• Customer concentration (one or two customers making up half the revenue)
• Declining revenue or shrinking margins
• Deferred maintenance on equipment or facilities
• Messy books that force the buyer to guess at the real numbers
• Industry headwinds or regulatory risk

The single biggest factor we see on Rejigg is owner dependence. A business that runs without the owner is worth meaningfully more than one where the owner is the business. Buyers are buying future cash flow, and if that cash flow walks out the door with you, the multiple drops.

For a deeper look at what actually moves value, see our guide on how to value your business for sale.

The Owner Perception Gap

Here's where it gets real. Most owners overvalue their business by 20-40%. We see this pattern over and over.

The reasons are understandable. You spent 15 years building this thing. You sacrificed weekends, put personal money in during the lean years, and grew it into something that supports your family and your employees.

That sweat equity feels like it should count for something. And emotionally, it does. But a buyer can't put a multiple on your sleepless nights.

Buyers value future performance, not past sacrifice. They look at what the business did in the last three years, how likely those results are to continue, and how much work they'll need to put in to keep it running. The price they're willing to pay reflects their risk, not your effort.

Some owners go the other direction and undervalue. This is less common but it happens, especially with owners who are burned out and just want to be done. They haven't looked at comparable transactions and don't realize their business is worth more than they assumed.

Both gaps are fixable. The solution is the same: get a realistic valuation based on market data before you start talking to buyers. Walking into negotiations with a number that's grounded in what similar businesses actually sold for changes the entire dynamic.

Formal vs. Informal Valuations

There are two levels of valuation, and you don't always need the expensive one.

Informal valuation: Uses market multiples applied to your adjusted earnings to produce an estimated range. This is what Rejigg's valuation calculator does.

It takes your financial data, adjusts for owner add-backs, and applies industry-relevant multiples. You get a range, not a single precise number, because a range is more honest. This is enough for most owners who are exploring whether to sell and want to understand what they might get.

Formal valuation (business appraisal): Conducted by a certified appraiser (often a CVA or ASA-credentialed professional). Costs $5,000-$20,000+ and takes weeks. Produces a detailed report with a defensible opinion of value.

When Do You Need a Formal Valuation?

You need a formal valuation in specific situations: divorce proceedings, estate planning, partnership buyouts or disputes, or when an SBA lender requires one for financing. These are situations where a third party needs an independent, credentialed opinion.

For selling your business on the open market? You generally don't need one.

The market itself determines the price. Buyers will do their own analysis based on your financials, and the final sale price comes from negotiation, not from an appraiser's report. Spending $15,000 on a formal valuation before listing doesn't mean a buyer will pay that number.

How Buyers Form Their Own Valuation

This is worth understanding because it shapes how negotiations go. Buyers don't accept your valuation. They build their own.

A serious buyer will request your financials, build their own adjusted earnings number, apply their own multiples, and arrive at a range they're comfortable paying. They might adjust your numbers differently than you did. Maybe you added back a family member's salary, but the buyer plans to hire someone for that role at market rate. That's a legitimate adjustment that changes the math.

Buyers also factor in things that don't show up in your P&L. How much will the transition cost?

Will they need to invest in new equipment? Are there key employees who might leave? Each of these factors reduces what they're willing to pay relative to the headline multiple.

The more transparent and organized your financials are, the easier this process is for buyers. That's why having a proper data room with clean records matters so much. When buyers can verify numbers quickly, they gain confidence. When they have to dig and guess, they discount the price to account for uncertainty.

On Rejigg, the built-in data room lets you share financials, tax returns, and key documents with buyers securely. You control who sees what and when. That transparency builds trust and keeps the process moving.

How to Get a Realistic Number

Getting to a number you can trust takes a few steps.

1. Clean up your financials.

Separate personal expenses from business expenses. If your business pays for your truck, your cell phone, your spouse's salary, or your kid's health insurance, those are add-backs that increase your SDE. But they need to be clearly documented.

2. Calculate your adjusted earnings.

Start with your net income, add back your salary, interest, depreciation, and any personal expenses. That gives you your SDE. Rejigg's valuation tool walks you through this, and the QuickBooks integration can pull your financial data automatically.

3. Research comparable multiples.

What are businesses like yours actually selling for? This is where market data matters. Industry, size, geography, and growth rate all affect the multiple.

4. Be honest about your weaknesses.

If you know the business is owner-dependent, or that one customer makes up 30% of revenue, factor that in. Buyers will find these things during due diligence. It's better to price them in upfront than have the deal repriced later.

5. Think in ranges, not exact numbers. A valuation of "between $1.8M and $2.4M" is more useful than "$2.1M." The range gives you room to negotiate and accounts for the fact that different buyers will see different value depending on their situation.

What a Valuation Tells You (and What It Doesn't)

A valuation tells you what the market is likely to pay based on your financial performance and comparable transactions. That's valuable information.

It doesn't tell you what a specific buyer will offer. It doesn't account for a buyer who sees strategic value beyond the numbers, like a competitor who would absorb your customer list into their existing operation. And it doesn't capture intangible factors like your reputation in the community or the relationships your team has built.

Those intangibles can influence a deal, but they're hard to quantify and buyers rarely pay a premium for them explicitly. The best approach: get a solid valuation based on the numbers, then let the intangibles work in your favor during conversations.

Next Steps

If you're curious what your business might be worth, Rejigg's free valuation tool gives you an estimate in minutes. It connects to QuickBooks, adjusts for owner add-backs, and uses real transaction multiples. No cost, no commitment, and you can list your business for free whenever you're ready.

Frequently Asked Questions

How much does it cost to get a business valuation?

An informal valuation using online tools like Rejigg's calculator is free. Formal valuations from certified appraisers typically cost $5,000-$20,000 depending on business complexity. Most owners exploring a sale don't need a formal appraisal unless it's required for legal proceedings, estate planning, or SBA lending.

What multiple is typical for a small business?

Most small businesses sell for 2-4x SDE, though this varies significantly by industry, size, and growth. Businesses with recurring revenue, diversified customers, and owner-independent operations command higher multiples. Service businesses with strong owner dependence tend to land at the lower end of that range.

How long does a business valuation take?

An informal valuation takes minutes if your financials are organized. Rejigg's tool can pull data directly from QuickBooks and produce an estimate the same day. A formal valuation from a certified appraiser takes 2-6 weeks and involves detailed financial analysis, site visits, and a written report.

Can I value my business myself?

Yes. If you know your SDE or EBITDA and have access to comparable transaction data, you can estimate your value using the multiples method. The hard part is being objective about your own business. Tools like Rejigg's valuation calculator help by applying market-based multiples so you don't have to guess.

Why would a buyer's valuation differ from mine?

Buyers adjust earnings differently, apply different multiples, and factor in transition costs, capital expenditures, and key-person risk that sellers often overlook. They're also accounting for their own cost of financing and the return they need on their investment. A 15-20% gap between seller and buyer valuations is common and normal in negotiations.