A business valuation before selling sets a fair price range. Learn the three main methods, what SDE means and which records buyers expect.
Featuring Larry Lynn Business Valuations
October 16, 2026
6 minute read
A business valuation before selling gives you a price range grounded in records rather than hope. Picture this: you list your company at the number you have carried in your head for years. Then serious buyers walk away after their first look at the books. A valuation helps you avoid that. This guide covers the main methods, what seller’s discretionary earnings mean and which records to prepare.
Key takeaways
The U.S. Small Business Administration advises owners to use a business valuation to set a value before marketing to buyers. It also suggests valuing all the property tied to your company. That can include intangible assets, such as brand presence, intellectual property, customer information and future revenue.
In short, a valuation tells you what a buyer might reasonably pay. It also shows which parts of your business add value and which parts may worry a buyer. As a result, many owners use it as a to-do list, not just a price tag.
The SBA describes three common approaches. Each one looks at your company from a different angle:
| Approach | What it looks at |
|---|---|
| Income | Projected revenue, adjusted for potential risks |
| Market | Similar businesses that have recently sold |
| Asset | Total assets minus total business liabilities |
A valuation may weigh more than one method. For example, the asset approach may say little about a service firm with few physical assets. On the other hand, it may matter more for a company that owns a lot of equipment. Either way, ask whoever prepares your valuation which methods they used and why. A clear explanation helps you defend your price when a buyer pushes back.
For many small companies, buyers focus on cash flow to the owner. The International Business Brokers Association glossary calls this discretionary earnings, also known as seller’s discretionary earnings or SDE.
SDE starts with earnings before income taxes, interest, depreciation and amortization. Then it adds back one owner’s entire pay and benefits, plus one-time items and personal expenses run through the business. The idea is to show what a new owner could take home. The same glossary explains that a multiple can be the ratio of selling price to discretionary earnings for a small business.
Watch out: Add-backs only count if you can prove them. If you cannot show that an expense was personal or one-time, a buyer may not accept it, and your earnings will look smaller.
Keep a simple add-back schedule as you go. List each item, the amount and the document that proves it, so you never rebuild it from memory.
Your reputation, staff, customer list and systems all carry value. The IBBA defines goodwill as the elements of a business that keep customers coming back. Because goodwill is hard to measure, it needs strong support in your numbers.
Taxes come into play here too. The IRS page on the sale of a business explains that a lump-sum sale counts as a sale of each individual asset. Both buyer and seller must use the residual method to split the price among the assets, including goodwill. Therefore, talk with your accountant early about how taxes may affect the deal.
New Jersey note: When business assets change hands, the state’s bulk sale notification rule applies. The buyer files Form C-9600 with a copy of the contract at least 10 business days before closing. So build that step into your timeline.
Good records make a business valuation before selling faster and your numbers more believable. Start gathering these early:
Tip: Note anything that depends on you personally, such as key client relationships. Buyers want to know the business can run without you, so start handing off those ties now.
An intermediary, often called a business broker, helps buyers and sellers of privately held companies. According to the IBBA glossary, the work can include estimating value and advertising the business with or without revealing its name. It can also include managing buyer interviews, guiding negotiations and helping with due diligence.
Confidentiality is a big part of the job. The glossary notes that a broker’s marketing summary goes only to qualified buyers who have signed a nondisclosure agreement. That way, your staff, customers and competitors do not hear about the sale too soon. Every sale is different, but many follow a similar path:
The SBA also mentions options beyond a single outright sale, such as a gradual sale or a lease. Your advisors can help you decide which path fits your goals.
Not always. The valuation gives you a reasoned range. Your asking price may sit above or within it, depending on your goals, your timeline and what similar businesses have sold for.
Ideally, get one well before you plan to sell. That gives you time to fix issues, document add-backs and grow value first. A later update then shows buyers how the numbers have improved.
It depends on why you need the number. A sale may call for a different report than a loan, a partner buyout or a legal matter. For example, the IBBA describes a broker’s opinion of value as a special limited appraisal.
A confidential process lowers that risk. Brokers usually share detailed information only with qualified buyers who sign a nondisclosure agreement. You then decide when and how to tell your team, ideally with advice from your broker and your attorney.
Larry Lynn is a business intermediary with the Montclair, New Jersey office of Murphy Business Sales. He helps owners sell their companies and guides buyers through acquisitions. The office also prepares business valuation reports for clients in towns such as Montclair, Livingston and West Orange.
Larry brings more than 25 years in real estate, including owning a residential property management company. He also spent about two decades as a property and casualty insurance broker. If you want a business valuation before selling, even years from now, visit his profile to call, email or request an introduction. Murphy Business franchises are independently owned and operated.
Larry is part of our Starting or Growing a Business referral team. You can also meet Larry Wefferling, CPA or bookkeeping and CFO provider Rich Hauser for help getting your numbers in order. For more advisors, browse the financial, insurance and accounting members.
This article is general information, not legal, tax or financial advice. For advice about your situation, speak with a licensed attorney, CPA or other qualified professional.
Tell us a little about what you need. We will pass it to Larry, who will get back to you directly. No cost, no obligation.
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