What a Business Is Actually Worth When You Sell It

Key takeaways

• Your price, the buyer's price and the lender's appraised value are separate numbers: SBA's change-of-ownership rules cap financeable debt at the appraised value, so anything you win above it has to arrive as the buyer's cash.
• Multiples get applied to rebuilt earnings, not reported profit, and because a multiple magnifies every recurring dollar, the argument over what a replacement manager costs moves the price by several times itself.
• The January 2026 NYU Stern dataset puts the aggregate U.S. public-market EV/EBITDA at 19.73x across 5,994 firms; an owner-operated business trades at a small fraction of that, and every reason for the gap is nameable: illiquidity, concentration, unaudited books, and a seller who is the product.
• Headline price is not proceeds. Purchase-price allocation, the working-capital peg, escrow, a standby seller note and the tax character of each dollar all take a bite before the wire clears.

Three numbers, one business

Ask an owner what the business is worth and you get one number. Ask the buyer and you get a smaller one. Ask the buyer's lender and you get a third. All three can be defensible at once, because they answer different questions.

Your number answers: what did this cost me, and what would make leaving feel fair? The buyer's number answers: what will this throw off after I pay someone to do the job you currently do for free, and what is the chance it keeps throwing it off once you are gone? The lender's number answers only one thing: how much debt can this cash flow safely carry? Those are not the same question, so they do not have the same answer.

When an SBA-guaranteed 7(a) loan is financing the purchase, the third number has teeth. Under SBA's lender rulebook, a change-of-ownership loan requires a business valuation from an accredited Qualified Source, and that valuation must be requested by and prepared for the lender: “The Lender may not use a business valuation prepared for the Applicant or the seller.” The lender then verifies the financial information the appraiser relied on against the seller's IRS transcripts. And the consequence is blunt: total debt supporting the transaction “is limited to the business valuation amount,” and “if the amount paid for the business exceeds the business valuation, the difference must be made up by equity.”

Read that twice, because it quietly settles most price arguments. You can negotiate any price you like. Above the appraised number, you are not negotiating price. You are negotiating how much cash your buyer personally has to find. Most buyers do not have it. So the appraisal is not a formality that happens after the handshake; it is the ceiling the handshake was always sitting under.

Normalization: earnings get rebuilt before they get multiplied

Nobody buys reported net profit. Reported profit is the number your accountant engineered to be small for the IRS, run through a business that also pays for your truck, your phone and your health insurance. Before any multiple touches it, earnings are rebuilt.

Two yardsticks do the rebuilding. SDE, or seller's discretionary earnings, starts at pre-tax profit and adds back one owner's compensation, owner perks, interest, depreciation, amortization and genuinely non-recurring items. It answers: if I bought this and ran it myself, what would it pay me? Adjusted EBITDA does almost the same arithmetic but then subtracts a market-rate salary for whoever will actually run the place. It answers: what does this earn as an asset, with a manager in it? Which yardstick applies is convention, not law: owner-operated businesses are usually quoted on SDE, larger ones on adjusted EBITDA, and the crossover is negotiable. The number you quote depends on which language you are in, and quoting the wrong one makes you look either greedy or naive.

Illustrative only: round numbers, not measurements. A services company reports $180,000 of net profit. The owner takes a $70,000 salary. The P&L also carries $18,000 of vehicle and travel a hired manager would not spend, $12,000 of legal fees from a lawsuit that settled and will not recur, $22,000 of depreciation and $26,000 of interest on a loan the buyer will not assume. SDE is 180 + 70 + 18 + 12 + 22 + 26 = $328,000. Now replace the owner: a general manager who can do the quoting, the scheduling and the customer calls costs $95,000. Adjusted EBITDA is 328 − 95 = $233,000. At 3x SDE the business prices at $984,000; at 4.5x adjusted EBITDA, $1,048,500. Both are honest.

Now change one assumption. Suppose the owner is also the master estimator, and a real replacement costs $140,000, not $95,000. Adjusted EBITDA drops to $188,000 and the 4.5x price drops to $846,000. A $45,000 disagreement about one salary line moved the price roughly $200,000, because in a multiple world every recurring dollar of disagreement is multiplied. This is why the IRS publishes a Reasonable Compensation job aid for its own valuation professionals: what an owner-employee should be paid is a contested, evidence-based question, not a plug.

Add-backs are where sellers get creative and where deals die. SBA now forces the issue at scale. For change-of-ownership transactions with a business purchase price of $3 million or more, the lender must obtain a Quality of Earnings report that “must include a Cash Proof”: a reconstruction of cash receipts and disbursements reconciling bank statement data to the income statement and the tax return, on both a trailing-twelve-month basis and the last two fiscal years. That report must also “identify and document all add-backs and adjustments.” Under that standard, an add-back is not a claim you assert. It is a claim someone reconciles to a bank statement.

Where the multiple comes from

A multiple is not a market convention someone looked up. It is the reciprocal of a required return, adjusted for growth. A buyer paying 4x adjusted EBITDA is demanding roughly a 25% pre-tax yield on the purchase price. Ask why anyone needs 25% when a Treasury pays a fraction of that, and you have asked the only question in valuation. The answer is: because these earnings might not be there next year, because you cannot sell this in a week, and because a large share of the cash flow currently depends on a person who is leaving.

The size of that risk premium is visible when you compare markets. In the January 2026 update of the NYU Stern enterprise-value dataset, the aggregate U.S. figure in the EV/EBITDA column is 19.73x across 5,994 firms, and 16.95x for the 4,822 non-financial firms. Those are public companies: audited, liquid, professionally managed, with disclosed successors. A $250,000-SDE plumbing company does not trade anywhere near that, and the distance is not a bargain hiding in plain sight. It is the market pricing every difference between those two things. Each difference has a name: no audit, no liquid market, one owner holding the customer relationships, no successor, and a revenue base that can be re-tendered next quarter.

The IRS has said for decades that there is no formula here. Rev. Rul. 59-60 was issued in 1959 and is still cited in the IRS's own examination guidelines when an examiner reviews a closely held business appraisal. It directs appraisers to weigh a list of factors including the nature and history of the business, the economic and industry outlook, book value and financial condition, earning capacity, dividend-paying capacity, goodwill, prior sales of stock and the market prices of comparable listed companies, without fixing their weights.

The IRS's own Discount for Lack of Marketability job aid goes further. Published for its valuation analysts as reference material rather than as official position, it notes that the studies practitioners use to size illiquidity discounts “can indicate widely diverse conclusions,” and that the profession “does not identify acceptable or unacceptable methods for estimating marketability discounts.” Even the people auditing the answer decline to call this arithmetic. Anyone who quotes you a single certain number should be treated accordingly.

The practical version: within an industry band, where you land is set by transferability. A thousand small customers beats one customer at 40% of revenue. Contracted recurring revenue beats project work. Documented systems and a manager already in the chair beat a founder with everything in their head. Clean, reviewed financials beat a shoebox. Each of those moves you within the range, and the range is narrow enough that they matter more than haggling.

Why the buyer's number is lower — structurally, not rudely

Buyers are not lowballing you out of theatre. Four structural forces push their number down, and three of them are written into someone else's rulebook.

First, the debt ceiling. Illustrative only: on the $233,000 of adjusted EBITDA above, a lender underwriting to a 1.25x debt-service coverage ratio, SBA's required minimum for an initial acquisition, will allow at most $233,000 ÷ 1.25 = $186,400 of annual debt service. At a ten-year amortization and roughly 10% interest, $1,000,000 of debt costs about $158,600 a year, so the coverage-implied debt ceiling is around $1.18 million. That is the buyer's upper bound before the appraisal even speaks, and the appraisal caps it again. Two independent ceilings, and the lower one wins.

Second, the equity floor. SBA requires a minimum 10% equity injection on an initial acquisition and states it “cannot be reduced or eliminated.” A seller note only counts toward that injection if it is on full standby: no principal and no interest for the entire term of the 7(a) loan. A seller who wants a note that pays monthly has just made that note debt, not equity, and pushed the buyer's cash requirement up by the same amount.

Third, the clock on you. In a business-expansion or initial-acquisition change of ownership, the seller “may not remain as an officer, director, stockholder, or employee of the business,” and any transition help must be a consulting contract “not to exceed 24 months (in aggregate, including any extensions).” Whatever knowledge lives only in your head has a hard expiry date, and the buyer prices that. Note also that SBA prohibits seller earnouts in these deals while allowing buyer rebates tied to performance, so the familiar “we'll bridge the gap with an earnout” move is simply unavailable in a lot of main-street financing, and the gap has to be closed with price, structure or nothing.

Fourth, working capital. Most deals are quoted debt-free, cash-free: you keep the cash, you clear the debt, and you deliver a normal level of receivables, inventory and payables. Illustrative: a $1,000,000 deal sets the peg at the trailing-twelve-month average net working capital of $120,000 (receivables $150,000 plus inventory $40,000 less payables $70,000). If you spend the last quarter collecting hard and stretching vendors, you might hand over $85,000, and the price adjusts down $35,000 at settlement. Sellers who treat the peg as boilerplate discover it as a five-figure surprise weeks after close.

From headline price to money in your pocket

The number in the press release and the number on the wire are different, and the distance between them is mostly tax character and timing.

In an asset sale, the price is allocated across asset classes, and the allocation is not a private matter. Section 1060 requires the residual method and requires both sides to report it; buyer and seller each file Form 8594 with their returns. The buyer wants dollars in equipment and in a non-compete, because those deduct fast. You want dollars in goodwill, because that is capital gain. Illustrative: on a $1,000,000 price, $150,000 to fully depreciated equipment triggers recapture taxed at ordinary rates; $50,000 to a non-compete is ordinary income to you and a 15-year amortization to the buyer; $800,000 to goodwill is capital gain. Shift $100,000 from goodwill to equipment and the buyer gains and you lose: same headline, different life. Negotiate the allocation with the price, not after it.

Structure takes another slice. Illustrative: from that $1,000,000, hold back 10% in escrow for 18 months, carry a $150,000 standby seller note, pay a 10% intermediary fee, spend $25,000 on legal and accounting, and pay off a $60,000 equipment loan. Cash at close is $565,000 before any tax. The other $435,000 is a mixture of money you might get, money you will get slowly, and money that was never yours.

Entity form set the ceiling years ago. Qualified small business stock under section 1202 can exclude a large slice of gain, and for stock acquired after July 4, 2025 the exclusion is tiered at 50% after three years, 75% after four and 100% after five, with a per-issuer cap of $15,000,000 (indexed from 2027) and a $75,000,000 aggregate-gross-assets test at issuance. It applies to C corporation stock. S corporations are excluded by statute. That is a decision made at formation that pays or costs at exit, and it cannot be retrofitted the week you sign a letter of intent.

The honest summary: the price is a negotiation, the proceeds are an engineering problem, and the engineering has to start before the negotiation does.

What actually moves the number in the last 24 months

Almost nothing about valuation is decided at the negotiating table. It is decided in the two years before, by whether you spent them making the business less about you.

The highest-return work is boring. Move customer relationships to the company: shared inboxes, a real CRM, a named account owner who is not you, quotes signed by someone else. Convert project revenue to contracted recurring revenue wherever the customer will tolerate it, since a maintenance agreement at half the margin is worth more per dollar than a one-off job and survives your departure. Break customer concentration deliberately; SBA's Quality of Earnings standard now names “customer concentration risk, contract continuity, and the likelihood that existing revenue and margins will be maintained post-sale” as things the report must assess, which means your concentration is going to be measured by a stranger whether or not you mention it.

Then fix the books, because unverifiable earnings are discounted earnings. Reconcile monthly. Stop running personal expenses through the business at least two full fiscal years before you sell, because every add-back you eliminate is an argument you never have to win, and the Cash Proof will find the ones you keep. Move to reviewed financials if you can afford it. Get an equipment list with real ages. Put leases, licences and key contracts in a folder and check which ones are assignable, because an unassignable contract is a revenue line that evaporates at close.

Last, make yourself removable, and measure it honestly: could the business run for two weeks with you unreachable? Not survive: run. Quote work, resolve a supplier dispute, handle an angry customer, make payroll decisions. If the answer is no, you do not own a business at a multiple; you own a job at a discount, and the appraiser will say so in writing.

One closing calibration. A minority stake in a private company is worth less than its arithmetic share, because it cannot be sold and cannot control anything. That is the discount for lack of marketability the IRS job aid discusses, and a partner buying out a partner will meet it head on. If you own 30% of a company worth $3,000,000, your cheque is not $900,000 by default. Know that before the conversation, not during it.

Put it to work

Rebuild last year's earnings both ways, as SDE and as adjusted EBITDA after a real market-rate manager, and put each add-back next to the bank statement that proves it. Divide the adjusted figure by 1.25 to find the debt service your cash flow supports, then work backwards to the price a financed buyer could pay. Finally model net proceeds: peg, escrow, standby note, fees, and the tax character of every allocated dollar.

Sources & references

Linked entries open the named source directly. Entries without a link say exactly what kind of reference they are — and how to check them yourself.

• U.S. Small Business Administration — SOP 50 10 8.1 (7(a) change of ownership: business valuation, Quality of Earnings, equity injection, seller standby)
• IRS — Valuation of assets (job aids for IRS valuation professionals)
• IRS — IRM 4.25.5, Technical Guidelines for Estate and Gift Tax Issues (closely held business lead sheet; Rev. Rul. 59-60)
• IRS — Reasonable Compensation Job Aid for IRS Valuation Professionals
• IRS — Discount for Lack of Marketability Job Aid for IRS Valuation Professionals (2009)
• NYU Stern (Damodaran) — Enterprise value multiples by sector, U.S., January 2026
• 26 U.S.C. § 1060 — Special allocation rules for applicable asset acquisitions
• IRS — About Form 8594, Asset Acquisition Statement Under Section 1060
• 26 U.S.C. § 1202 — Partial exclusion for gain from certain small business stock