How to Value a Small Business: The Three Approaches, and What Buyers Actually Pay

How to value a small business comes down to three approaches and one uncomfortable caveat. The Internal Revenue Manual’s business valuation guidelines state that “the three generally accepted valuation approaches are the asset-based approach, the market approach and the income approach,” and every credentialed valuer works inside them. The shortcut most sellers reach for is a multiple, and the published multiples are medians across every industry and size at once: BizBuySell’s Insight Report for the second quarter of 2026 covers 2,117 sales reported by brokers and puts the median price at $349,250, which is 0.7 times revenue and 2.7 times cash flow. That describes a market, not your business.

The short version: an industry rule of thumb is a reasonableness check, a valuation is an engagement with a published standard behind it, and if an SBA lender is financing the sale, the only valuation that counts is one prepared for the lender by an accredited Qualified Source.

How to value a small business: the three approaches, and who defines them

The Internal Revenue Manual sets them out for IRS valuation engineers, and the same three appear in the standards private valuers work under. The SBA’s own business guide puts them in plain English for owners: the income approach “looks at projected revenue and accounts for potential risks”; the market approach “compares your business to other similar businesses that have recently sold”; the assets approach “subtracts total business liabilities from the total value of all assets.”

The professional standards say the same thing and add the judgment call. NACVA’s Professional Standards, effective for engagements accepted on or after June 1, 2023, state that “valuation methods are commonly categorized into the asset-based, market, income, or a combination of these approaches. Professional judgment is used to select the approaches and the methods that best indicate the value.”

Two other authorities sit behind the work. Revenue Ruling 59-60 is the foundational IRS guidance on valuing shares in a closely held company, and CPAs who perform this work also operate under the AICPA’s Statement on Standards for Valuation Services No. 1. Neither changes the three approaches; they govern how the work is done and documented.

The standard of value is narrower than it sounds. IRS Publication 561, revised December 2025, says the fair market value of an interest in a closely held business “is the amount that a willing buyer would pay for the interest to a willing seller after consideration of all relevant factors.” The International Business Brokers Association defines fair market value the same way, as “the price at which property would change hands between a hypothetical willing and able buyer and seller, acting at arm’s length in an open and unrestricted market.” A hypothetical buyer, not the one strategic buyer who would pay more.

Where rules of thumb belong

Industry rules of thumb are everywhere: a multiple of monthly revenue, a dollar figure per customer, a multiple of annual fee income. NACVA’s standards address them directly. “Rules of thumb are acceptable as reasonableness checks, but should not be used as a stand-alone method.”

That is the standard-setter’s own position, and it is the line to hold. Use the multiple to sanity-check a number you reached another way. Do not use it as the number.

Whether your business is priced on SDE or EBITDA

Small business prices are quoted against one of two earnings figures, and which one depends on size. The IBBA and M&A Source Market Pulse survey states the dividing line in a footnote to its Q2 2026 highlights: purchase prices from under $500,000 to $2 million are reflected as a multiple of seller’s discretionary earnings, and $2 million to $50 million as a multiple of EBITDA.

The reason is who will run the business afterward. IBBA defines seller’s discretionary earnings as earnings before income taxes, non-operating and nonrecurring items, depreciation and amortization, interest, “one owner’s entire compensation, including benefits and any non-business or personal expenses paid by the business.” EBITDA is the same calculation without the owner’s pay added back.

Read the phrase “one owner’s entire compensation” carefully. A business run by two working owners does not get both salaries added back. And a buyer who intends to hire a manager rather than work in the business is buying EBITDA, because that manager’s salary is a real, recurring cost.

Lenders use the stricter measure. SBA SOP 50 10 8.1, effective October 1, 2026, defines operating cash flow as “earnings before interest, taxes, depreciation, and amortization (EBITDA)” and sets debt service coverage as EBITDA divided by combined debt service after the transaction.

What small businesses actually sold for

Two sources publish current figures a seller can read without a subscription. They measure different things and neither is a census.

BizBuySell describes its own method plainly: “closed transactions are reported to BizBuySell.com on a voluntary basis by business brokers nationwide.” These are brokers who chose to report, on one marketplace, and “cash flow” is the marketplace’s seller-reported field, closest to seller’s discretionary earnings.

The second source is the IBBA and M&A Source Market Pulse survey, which asks advisors what they saw rather than recording transactions. Its Q2 2026 medians by purchase-price band, published as a chart in the free highlights summary, run as follows. The full executive summary is available only to survey participants.

Two databases get quoted in this field and neither helps a Main Street seller. DealStats, from Business Valuation Resources, is a subscription database of closed private company acquisitions reporting multiples on sales, EBITDA and SDE. GF Data covers private-equity-sponsored transactions from $10 million to $500 million, reported by 330 contributor firms, which is an order of magnitude above most businesses that change hands.

Say what these numbers are when you use them. A 2.7 times cash flow median is the middle of every industry and every size in one quarter’s voluntarily reported sales. Customer concentration, owner dependence, contract quality, margin trend and the condition of the books move a real price far away from it in both directions.

The add-backs a buyer’s lender will test

Add-backs are the part of the earnings calculation a buyer is entitled to argue with. No standards body publishes a definitive list of permissible adjustments, but a federal agency does publish what a lender’s diligence must examine, which is the closest thing to an authoritative checklist a seller can prepare against.

SBA SOP 50 10 8.1 requires that a Quality of Earnings report “identify and document all add-backs and adjustments to the seller’s reported earnings, including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and accounting methodology differences between cash-basis and accrual-basis reporting.”

It also requires a reconciliation, and a specific piece of forensic work: the report “must reconcile the business’s accountant-prepared financial statements, tax returns, internal financial statements, and IRS transcript data to produce a normalized, adjusted earnings figure that reflects recurring, arm’s-length operations,” and must include a Cash Proof, defined as an analysis that “reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review,” performed on a trailing twelve months and the last two fiscal years.

Finally, it requires an assessment of “the quality and sustainability of the business’s revenue base, including customer concentration risk, contract continuity, and the likelihood that existing revenue and margins will be maintained post-sale.”

An owner who can produce that reconciliation without a scramble is in a different negotiating position from one who cannot. If your books are on the cash basis and the buyer’s analyst is working in accrual, the difference between the two is one of the named adjustments, and cash versus accrual accounting sets out what actually changes between them.

A worked example, using published medians

The arithmetic below is hypothetical. It is included to show how the pieces fit together, not as a valuation of any business, and the multiples it uses are medians across all industries.

Take a services company with $1,200,000 of revenue reporting $95,000 of net profit on its tax return. One working owner takes a $110,000 salary and $18,000 of health insurance through the business. Interest expense is $12,000, depreciation and amortization $25,000, and the year included a $15,000 legal settlement that will not recur.

Seller’s discretionary earnings: $95,000 plus $110,000 plus $18,000 plus $12,000 plus $25,000 plus $15,000, or $275,000.

At the 2.8 median reported by Market Pulse advisors for the $500,000 to $1 million band, that is $770,000, which falls inside the band the multiple came from. At BizBuySell’s 2.7 median cash flow multiple, it is $742,500.

Now change one assumption. A buyer who will not work in the business must hire a manager. Assume $85,000 fully loaded. The earnings figure the buyer is really pricing drops to $190,000, and the same 2.8 multiple produces $532,000. Nothing about the business changed. Only the buyer did.

That is the mechanism behind the SDE and EBITDA split, and it is why a single headline multiple is close to useless without knowing which earnings figure sits underneath it.

A valuation engagement is not the same as a calculation engagement

This distinction decides what an owner is actually buying, and the difference is easy to miss on a quote. NACVA’s standards define two levels of engagement.

A valuation engagement “requires that a member/credentialed designee apply valuation approaches or methods deemed in the member’s/credentialed designee’s professional judgment to be appropriate under the circumstances and results in a Conclusion of Value.” A calculation engagement “occurs when the client and member/credentialed designee agree to specific valuation approaches, methods, and the extent of selected procedures and results in a Calculated Value.”

The reporting rules follow. Under the same standards, a conclusion of value may be presented in a summary or a detailed report, while a calculated value must be presented in a calculation report, and that report must carry a legend beginning “This Calculation Engagement did not include all the procedures required for a Conclusion of Value.”

Source: NACVA Professional Standards, effective for engagements accepted on or after June 1, 2023.

Both have legitimate uses. A calculation engagement is faster and cheaper and can be enough for an internal planning discussion. It is not what a lender, a court or the IRS is looking for. Ask, in writing, which one you are ordering.

When a formal valuation is required

In a private sale with no lender involved, no rule requires a valuation at all. The requirement arrives with the financing.

SBA SOP 50 10 8, in effect through September 30, 2026, allows a lender to perform its own valuation where the amount being financed minus appraised real estate and equipment is “$250,000 or less.” Above that, or where there is a close relationship between buyer and seller, “the Lender must obtain an independent business valuation from a Qualified Source,” and loan proceeds for the change of ownership “may not exceed the business valuation.”

SOP 50 10 8.1 takes effect on October 1, 2026, so a deal closing around that date needs to know which procedure governs it. Under 8.1 the 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,” it must state “the individual’s conclusion of value” along with the valuer’s qualifications and signature, and it “must support the Purchase Price … regardless of how the debt is structured. If the amount paid for the business exceeds the business valuation, the difference must be made up by equity.”

Read that last sentence as a seller. A price the lender’s valuation will not support does not collapse the deal automatically; it moves the gap onto the buyer’s cash. Ask your lender which SOP applies to your closing date before anyone orders a report.

The same SOP defines a Qualified Source as someone who “regularly receives compensation for business valuations” and is accredited by one of five named organizations, independent of the loan production function and free of any appearance of a conflict of interest:

• ASA, Accredited Senior Appraiser, American Society of Appraisers
• CBA, Certified Business Appraiser, Institute of Business Appraisers
• ABV, Accredited in Business Valuation, AICPA
• CVA, Certified Valuation Analyst, NACVA
• BCA, Business Certified Appraiser, International Society of Business Appraisers

Note what is not on that list. The Certified Exit Planning Advisor credential, issued by the Exit Planning Institute, is an exit planning designation rather than an appraisal accreditation, and a valuation prepared by a CEPA will not satisfy an SBA lender unless that person also holds one of the five above.

Valuation also arrives in places that have nothing to do with a sale. In Connelly v. United States, decided June 6, 2024, a unanimous Supreme Court held that “a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces a corporation’s value for purposes of the federal estate tax,” in a case where company-owned life insurance funded the redemption under a buy-sell agreement. Anything written about redemption-funded buy-sell arrangements before that date should be re-read with counsel, and our guide to exit planning for partnerships is where that structure sits in a wider exit.

Who to bring in, and when

The credential to look for depends on what the number is for. A conversation with a broker about what your business might fetch is free and is not a valuation. A report that a lender, a court, a partner or the IRS will rely on is a professional engagement, and the issuing bodies publish what stands behind each designation.

Bring the valuer in early enough that the answer can still change something. A year of clean, reconciled monthly books is worth more at the negotiating table than any report, and if the gap is reporting quality and margin analysis rather than compliance, that is fractional CFO work rather than valuation work. Our directory lists CPA firms by state and city, and the exit planning process checklist sets out where valuation falls in the wider sequence. Once you have a number you trust, how to sell a small business covers what happens next.

Frequently Asked Questions

Sources

16 links

• Internal Revenue Manual 4.48.4, Business Valuation Guidelines
• IRS Publication 561, Determining the Value of Donated Property
• SBA SOP 50 10 8, effective June 1, 2025
• SBA SOP 50 10 8.1, effective October 1, 2026
• SBA: close or sell your business
• Supreme Court of the United States, Connelly v. United States, No. 23-146, decided June 6, 2024
• NACVA Professional Standards, effective June 1, 2023
• BizBuySell Insight Report
• IBBA and M&A Source Market Pulse Q2 2026 highlights
• IBBA resource center glossary
• AICPA: Accredited in Business Valuation (ABV) credential
• NACVA: Certified Valuation Analyst qualifications
• American Society of Appraisers: AM and ASA business valuation credentials
• Exit Planning Institute: Certified Exit Planning Advisor program
• Business Valuation Resources: DealStats
• GF Data