How $1M–$25M businesses are actually valued.
Most owners hear a number from a broker and a different number from a peer and have no way to reconcile them. Here's the actual machinery.
The starting point: an earnings multiple
For businesses in the $1M–$25M revenue range, valuations almost always start with EBITDA × multiple (or SDE × multiple for owner-operated businesses below ~$2M EBITDA). EBITDA is your earnings before interest, taxes, depreciation, and amortization. SDE is EBITDA plus the owner's compensation and benefits. Choosing the right earnings base matters enormously — get it wrong and you over- or under-state the business by 30%+.
Normalize the earnings base
Buyers don't pay for your earnings as reported on the tax return — they pay for the earnings the business will produce under their ownership. That means adjusting ("normalizing") for: (a) excess owner compensation above market, (b) personal expenses running through the business, (c) one-time legal/M&A/build-out costs, (d) related-party rent above or below market, and (e) discretionary spend (sponsorships, family travel) that a new owner won't repeat.
Pick a defensible multiple range
Multiples come from comparable transactions in your industry, adjusted for size, growth, margin profile, and concentration. A specialty manufacturing business at $2M EBITDA might trade at 3.5–5.5×. A SaaS business at the same EBITDA with 90%+ gross retention might trade at 4.0–7.5×. Industry, scale, and quality drive 80% of the range.
Apply concentration & quality adjustments
A buyer will discount for: customer concentration above 20%, vendor concentration, owner dependence on sales, undocumented operations, and key-employee flight risk. Each of these is typically worth 0.2×–0.8× off the multiple. The good news: most are fixable in 6–12 months if you start now.
Sellability ≠ valuation
Two businesses with identical EBITDA can land at very different prices. The difference is sellability — how easy is it for a buyer to step in, finance the deal, and run the business without you? ExitReady scores sellability across five dimensions on a 0–4 GPA scale so you can see exactly what's compressing your number.