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How Buyers Actually Value a Small Business

Most buyers use a simple framework. It is not complicated, but it is very different from how most owners think.

Step 1: Estimate cash flow

For many small businesses, cash flow is roughly 15% to 25% of revenue depending on the industry.

Step 2: Apply a multiple

Most small businesses trade between 3x and 5x annual cash flow.

Step 3: Adjust for risk

• Does the business rely heavily on the owner?
• Has revenue been stable or declining?
• How quickly does cash come in?
• Are there a few key customers or employees?

Each of these factors slightly increases or decreases the final multiple.

Reality

Banks use this same logic when deciding whether to finance a deal. If the numbers do not support a loan, the buyer usually cannot move forward.

If you want a quick estimate based on this framework:

Try the valuation calculator