Whether you’re planning to sell your business, bring in investors, or prepare for retirement, knowing the true value of your company is essential. Business valuation isn’t just about profit; it includes risk, assets, market trends, and the strength of your operations. Fortunately, understanding how to value a business doesn’t have to be complicated.
This guide breaks down simple steps to help you determine what your business is worth.
Why Business Valuation Matters
A proper valuation helps you:
-
Set a realistic asking price
-
Negotiate confidently with buyers or investors
-
Plan for succession or retirement
-
Understand your company’s financial health
-
Identify areas that increase long-term growth
Business valuation is especially important in small and mid-sized businesses, where financial statements alone rarely tell the full story.
Steps to Value a Business
Below is a straightforward process any business owner can follow before speaking with a professional valuator or business broker.
Step 1: Organize Your Financial Statements
The valuation process begins with reliable financial records. Gather:
-
Profit and loss statements (past 3–5 years)
-
Balance sheets
-
Corporate tax returns
-
Cash flow statements
-
List of assets and liabilities
Strong documentation gives buyers confidence and allows for more accurate calculations.
Tip: Ensure your bookkeeping is up to date and any personal expenses running through the business are clearly identified. These adjustments help determine the real earning power of the business.
Step 2: Normalize (Adjust) Your Earnings
Small businesses often include discretionary expenses or one-time costs that don’t reflect ongoing operations. To determine true earning capacity, you must calculate Seller’s Discretionary Earnings (SDE) or EBITDA.
Seller’s Discretionary Earnings (SDE)
SDE = Net Profit
-
Owner’s salary
-
Owner’s benefits / perks
-
One-time or non-recurring expenses
-
Depreciation and amortization
± Adjustments for fair market compensation
SDE is commonly used for owner-managed small businesses.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
EBITDA is more common for larger companies with management teams in place.
A cleaner, normalized earnings figure helps potential buyers understand the business’s real profitability.
Step 3: Choose the Right Valuation Method
There are three common valuation methods used in the small-business marketplace.
1. Income Approach (Earnings-Based Method)
This method estimates what a buyer would pay based on expected future earnings.
The most common formula is:
Business Value = SDE × Industry Multiple
Industry multiples typically range from 1.5 to 5+ depending on factors like stability, growth, and risk.
Businesses with strong recurring revenue, long-term contracts, or strong customer concentration often command higher multiples.
2. Market Approach (Comparable Sales)
This method compares your business to similar businesses that have recently sold.
Examples include comparing:
-
Revenue size
-
Type of industry
-
Location
-
Profit margins
-
Customer base
Professional brokers have access to databases with real market sales data which often provides the most realistic market valuation.
Useful reference:
International Business Brokers Association (IBBA)
3. Asset-Based Approach
This method looks at the value of your assets minus liabilities.
It’s typically used for:
-
Asset-heavy businesses (manufacturing, construction, transportation)
-
Unprofitable businesses
-
Businesses in liquidation
Tangible assets may include equipment, vehicles, inventory, or property. Intangible assets, like brand reputation, trademarks, or customer lists, can also add value.
Step 4: Evaluate the Non-Financial Factors
Beyond numbers, buyers want to understand the qualities of the business. These factors may increase or decrease valuation:
What Increases Value
-
Strong team and management structure
-
Recurring revenue or contracts
-
Stable multi-year cash flow
-
Diverse customer base
-
High-quality equipment and systems
-
Attractive location or online presence
What Decreases Value
-
Reliance on one customer or one key employee
-
Outdated equipment or technology
-
Declining revenue trends
-
Poor documentation or messy bookkeeping
These elements influence the risk profile, which directly affects the multiplier used in the income approach.
Step 5: Assess the Market Conditions
The value of your business is affected by what’s happening in your industry and economy.
Consider:
-
Industry growth trends
-
Interest rates
-
Labour market conditions
-
Regional demand
-
Competition
A good place to explore industry outlooks:
Government of Canada industry statistics
If your industry is booming, buyers may be willing to pay a premium. If it’s shrinking, the valuation may be lower.
Step 6: Calculate the Business Value
After reviewing financial and non-financial factors, you can estimate a value.
Example:
If your adjusted SDE is $300,000 and industry multiples for your sector average 2.5–3.5, a potential valuation range might be:
$300,000 × 2.5 = $750,000
$300,000 × 3.5 = $1,050,000
Your true market value usually falls somewhere in that range depending on risk, growth, and operational strength.
Step 7: Get a Professional Valuation or Broker Opinion
While you can estimate your own valuation, a professional business broker provides access to:
-
Real comparable sales data
-
Industry-specific multiples
-
Market trends
-
Buyer demand
-
Professional negotiations
A broker also helps prepare documents, market the business confidentially, and negotiate price and terms.
For small and mid-sized Canadian businesses, working with a local broker ensures realistic pricing and a smooth selling process.
Common Mistakes to Avoid
-
Setting the price too high or too low
Overpricing limits buyer interest; underpricing leaves money on the table. -
Relying solely on net income
True value includes risk, growth, systems, and customer base. -
Ignoring your industry’s trends
Market conditions heavily influence what buyers will pay. -
Not preparing financials early
A well-organized business attracts more qualified buyers.
Conclusion
Valuing a business isn’t just about crunching numbers but it’s about understanding earnings, market conditions, and operational strength. Whether you’re preparing to sell or simply want a clearer picture of your business’s financial health, following these steps will help you estimate a realistic value.
A professional business broker can further refine the valuation, provide market insights, and guide you through the full selling process.
If you’re considering selling your business on Vancouver Island or want help determining its market value, the team at VI Business Broker can provide expert support tailored to your industry and business size.
