How do I value a closely held business before a sale?

The short answer

Most small businesses sell for a multiple of adjusted earnings (seller's discretionary earnings or EBITDA), so a working estimate of value is adjusted earnings times a market multiple, minus debt.

For a formal number, you value a closely held business by estimating fair market value: the price a willing buyer would pay a willing seller when neither is forced to act and both know the relevant facts. That is the IRS definition in Publication 561, and it is the same idea used in gift and estate valuation under Rev. Rul. 59-60.

There is no single formula. Appraisers and deal teams usually weigh three approaches (income, market, and asset), adjust for debt and working capital, and then ask what a real buyer of your firm would actually pay. The number on a napkin is rarely the number that funds your retirement.

How do I value my business before selling?

Start with the earnings a buyer would actually inherit, then test that figure three ways. Here is when each method is typically used.

To run rough numbers on your own company, try the business value calculator, then see what a sale might leave you after taxes with the business sale calculator. The free Exit Readiness Scorecard shows which gaps could lower your multiple.

What does "fair market value" mean for a private company?

Publication 561 defines fair market value as the price property would sell for on the open market between a willing buyer and a willing seller, with neither required to act and both having reasonable knowledge of the relevant facts. For an interest in a closely held business (sole proprietorship, partnership, or corporation), the publication says experts are usually required and lists factors that may help:

• The business's net worth and prospective earning power
• The nature and history of the business
• The economic outlook of the industry
• Position in the industry, competitors, and management
• Fair market value of the assets, including goodwill
• Values of interests in similar businesses

Rev. Rul. 59-60, which IRS valuation materials still cite for closely held stock, makes the same point: consider all available financial data and relevant factors. No general formula fits every case. That is why a "5x EBITDA and we are done" rule fails as soon as two companies in the same industry look different under those factors.

What are the three approaches buyers and appraisers use?

Income approach

You capitalize or discount expected future cash flows. A simple version is a multiple of earnings (for example, a multiple of EBITDA or seller's discretionary earnings). A more detailed version builds a forecast and discounts it at a rate that reflects risk. The income approach answers: what is this stream of cash worth today?

Market approach

You look at prices paid for similar businesses, or at public-company multiples, then adjust for size, margins, growth, and risk. Publication 561's business factors explicitly include the value of interests in similar industries. Comparables are scarce for private firms, so the adjustments matter as much as the headline multiple.

Asset approach

You value the tangible and intangible assets and subtract liabilities. This approach often sets a floor for asset-heavy firms and a reality check when earnings are thin or volatile. Goodwill, if present, still has to be supported by earning power, not by hope.

A serious valuation reconciles the three. If the income approach says $14 million and the market approach says $10 million, the work is explaining the gap, not averaging blindly.

How does a hypothetical owner turn earnings into a sale price?

Meet Dana, 58, a hypothetical example. Dana owns 100 percent of a specialty manufacturing company in North Carolina. The company has $2.4 million of adjusted EBITDA after normalizing owner compensation and one-time items. Dana has heard peers talk about "five times earnings" and wants to know what that implies before talking to an advisor or a buyer.

In this example, a $12 million enterprise value becomes about $10.9 million of equity value after debt and excess cash. Working-capital true-ups, earnouts, rollover equity, and taxes on the structure can move the cash Dana actually keeps by a large amount. The table is a planning scaffold, not a prediction of what any buyer would pay.

North Carolina's flat individual income tax would apply to taxable income from many sale structures for a resident seller, while federal capital-gain and ordinary-income character depends on whether the deal is stock, assets, or a hybrid. That tax layer is why the valuation conversation and the structure conversation should start together, often years before a letter of intent.

Why do structure and Form 8594 sit next to valuation?

Valuation answers what the business might be worth. Structure answers how the price is delivered and taxed. Under IRC section 1060, when assets that constitute a trade or business are transferred and the buyer's basis is set by the consideration paid, buyer and seller allocate the consideration among the assets. The residual method (the same family of rules used under section 338) typically pushes residual value into goodwill and going concern.

In practice, both sides generally file Form 8594, the Asset Acquisition Statement Under Section 1060, when goodwill or going concern value attaches or could attach. The form reports the agreed allocation by asset class. It does not invent the purchase price. It records how an already negotiated price is split for tax purposes, which can change the seller's mix of capital gain and ordinary income and the buyer's future depreciation and amortization.

If you only optimize the headline multiple and ignore allocation and stock-versus-asset form, you can "win" on enterprise value and still leave after-tax proceeds short of what you need to retire. That is the same trap discussed in how your business becomes your retirement: wealth inside the company only counts if it can get out on terms that fund your life.

What should an owner gather before anyone runs the numbers?

A valuation is only as good as the facts. Publication 561 tells donors to keep complete financial and other information near the valuation date, including reports by accountants and technical experts. For a sale, the same package helps:

1. Three to five years of financial statements and tax returns
2. A current interim period and a clear bridge from reported earnings to adjusted earnings
3. Customer and supplier concentration data
4. Cap table, debt schedule, and related-party agreements
5. Key-person roles, employment agreements, and succession depth
6. Any buy-sell agreement, life insurance funding, or prior offers

Owner dependence is often the quiet discount. If Dana is the rainmaker, the quality-of-earnings story and the multiple both suffer until the company can show transferable systems. Fixing that is operational work, not appraisal theater, and it belongs on the exit calendar early. The free Exit Readiness Scorecard is one way to see where preparation is thin before you pay for diligence.

The bottom line

Valuing a closely held business before a sale means estimating fair market value with full facts, usually through income, market, and asset approaches, then translating enterprise value into equity value after debt and working capital. IRS Publication 561 and Rev. Rul. 59-60 frame the factors. Section 1060 and Form 8594 frame how an asset deal's price is allocated for tax reporting. A multiple of EBITDA can start the conversation. It cannot finish it.

If a serious buyer called next quarter, would your financials, key-person risk, and deal structure support the number you have been telling yourself, or only the number you hope for?

For owner-focused planning next to a sale timeline, browse the business owner lessons or start with the free Retirement Reality Report.

Questions people ask next

What is fair market value for a private business?

The IRS defines fair market value as the price property would sell for on the open market between a willing buyer and a willing seller, with neither required to act and both having reasonable knowledge of the relevant facts. Publication 561 applies that definition to an interest in a closely held business and says expert help is usually required.

Do I need a formal appraisal before I sell?

For a negotiated sale, buyers run their own diligence and pricing. A formal appraisal is often used for estate, gift, ESOP, buy-sell, or charitable purposes. Publication 561 notes that valuing a closely held interest usually needs experts and complete financial records near the valuation date.

What is the difference between enterprise value and equity value?

Enterprise value is the value of the operating business before subtracting debt and adjusting for excess cash or working capital. Equity value is what the owners may receive after those adjustments. Letters of intent often quote enterprise value, so you must translate it into cash to the seller.

How does Form 8594 relate to valuation?

When a group of assets that makes up a trade or business is sold and goodwill or going concern value can attach, buyer and seller generally file Form 8594 under section 1060 and allocate the purchase price among asset classes using the residual method. That allocation is about tax reporting of the price, not about setting the price.

Can a multiple of EBITDA replace a full valuation?

A multiple is a shorthand from the market approach, not a complete answer. Two firms with the same EBITDA can deserve different multiples because of customer concentration, owner dependence, growth, margins, or balance sheet risk. Rules of thumb are a starting conversation, not a conclusion.

How much is my business worth if it makes $1 million a year?

It depends on which earnings figure that is and the multiple a buyer applies. As arithmetic only, $1 million of adjusted EBITDA at 4 times is a $4 million enterprise value, and at 6 times it is $6 million, before debt, working capital, and taxes. Customer concentration, owner dependence, growth, and margins move the multiple more than the headline profit does.

What is the difference between SDE and EBITDA?

Seller's discretionary earnings, or SDE, adds back one owner's full compensation and perks to profit, and is common for smaller owner-run companies. EBITDA assumes a buyer pays a market salary to whoever runs the business, so it is lower than SDE for the same company. Know which one a multiple is based on before comparing it to anything you have heard.