How do I value my small business?

The three approaches most valuations start from

An earnings-based valuation applies a multiple to normalized EBITDA (earnings before interest, tax, depreciation and amortization) or, for a smaller owner-operated business, seller's discretionary earnings (SDE). An asset-based valuation adds up the fair market value of what the business owns, net of what it owes, and fits a business with significant equipment, inventory, or real estate but little standalone earning power. A discounted cash flow approach projects future cash flows and discounts them back to a present value, and works best for a business with a longer track record of predictable growth.

Most small businesses lean on the earnings-based approach because it is the easiest to explain to a buyer, a bank, or a family member, and because reliable multi-year projections are hard to defend for a business that has not built one yet. The other two methods still matter as a check: an asset-based figure sets a practical floor, and a discounted cash flow exercise can reveal whether growth assumptions built into an earnings multiple actually hold up.

Why normalizing earnings matters more than the formula

Before any multiple gets applied, the accountant adjusts reported earnings to what the business would earn under a normal, arm's-length owner. Common add-backs include an owner's salary above or below market rate, one-time legal or renovation costs, rent paid to a related party at other than market rates, and personal expenses run through the company. Two businesses with identical reported profit can have very different normalized earnings once these adjustments are made.

This step is also where valuations most often go wrong. An owner who overstates add-backs to inflate the number, or a buyer who strips out legitimate reinvestment as if it were discretionary, both end up with a figure that will not survive scrutiny from a bank, the other side's advisor, or the CRA.

Normalized earnings matter to whoever is financing the deal as well. A bank asked to lend against a purchase price recalculates its own debt service coverage using normalized earnings, not the figure shown on the tax return, so an owner who has not gone through this exercise in advance is often surprised by how a lender's number differs from their own estimate.

Why the multiple you heard is probably not yours, and when a formal valuation is worth it

Multiples vary by industry, business size, growth rate, customer concentration, and how dependent the business is on the owner personally, and they move over time as market conditions change. A multiple quoted at a networking event or in an online forum was calculated for a different business in a different year, so treating it as a benchmark for your own is a common mistake. A professional services firm, a manufacturer, and a retail store are not judged on the same scale even when their normalized earnings are identical, because buyers price in how repeatable the revenue is, how much specialized skill the business depends on, and how much capital it takes to keep operating. We do not publish or quote a general multiple for any of these categories, since doing so without the underlying analysis would be more misleading than helpful.

A Chartered Business Valuator (CBV) produces a report that can withstand scrutiny from the CRA, a court, or the other side in a negotiation, and that level of rigour is generally worth the cost for an actual sale, an estate freeze, a shareholder buyout, or a matrimonial or shareholder dispute, since the number directly determines tax owing, a buyout price, or a settlement. For internal planning purposes, such as deciding whether to bring on a partner or simply tracking progress, an accountant's informal estimate using the same methods a formal valuation would use is often enough, without the cost of a full CBV engagement.

What actually moves the number before you sell

• Reducing how dependent the business is on the owner personally, through documented processes and a management team that can run without daily owner involvement.
• Diversifying the customer base so no single client represents an outsized share of revenue.
• Producing clean, reviewed or compiled financial statements for two to three years before a sale, rather than statements assembled at the last minute.
• Building recurring or contracted revenue where the business model allows it, since predictable revenue is valued more highly than one-off sales.

None of these changes happen quickly, which is why owners who plan a sale, a freeze, or a succession years in advance generally end up with a stronger number than owners who start thinking about value only once a buyer appears. A buyer's own advisors will test every one of these points during due diligence, so addressing them years ahead of a sale is far less disruptive than fixing them under the time pressure of an active deal. Our answer on handing a business to the next generation covers the planning window a freeze usually needs.

Whether the eventual transaction is structured as a sale of shares or a sale of assets also changes what each side actually nets from the same headline price, since the two structures are taxed differently for buyer and seller alike. Our answer on the lifetime capital gains exemption covers why many owners work hard to keep a sale structured as a share sale specifically.

How we help clients get to a number

As part of our advisory work, we prepare normalized earnings and an informal estimate using the same methods a formal valuation would use, so a client knows roughly where they stand before deciding whether a CBV engagement is worth commissioning. When the situation calls for a defensible report, whether for a sale, a freeze, or a dispute, we work alongside a CBV rather than attempting to replace one.