How Do You Determine Company Valuation? A Business Owner’s Guide to Recasting and Real-World Value

Whether you're a contractor running a seven-figure HVAC business or a local retailer approaching retirement, chances are you’ve asked yourself: How do you calculate how much a business is worth? Knowing your company’s value isn't just important when you’re ready to sell — it's vital for strategic planning, succession, financing, and personal wealth management.

But for most business owners, especially those in Main Street or lower middle-market sectors, understanding how to calculate a valuation can feel murky at best. Let’s break it down.

In this guide, we’ll walk through how to determine company valuation using practical financial methods, including how to recast financials by adding back personal and one-time expenses, and how these numbers translate into SDE and EBITDA-based valuation multiples. We’ll also show you how to value a business quickly using Alta Business Advisors’ free business valuation calculator.

Why Business Valuation Matters (Even if You’re Not Selling Yet)

Business valuation isn’t just for someone prepping for a sale. It’s a critical decision-making tool if you are:

• Planning for retirement or succession

• Bringing on a partner or investor

• Exploring financing or an SBA loan

• Separating business from personal finances

• Thinking about future opportunities (like franchising or expansion)

But how do you calculate the value of a business that’s privately held, owner-operated, and full of "gray areas" like personal expenses, non-cash items, and one-off costs?

Let’s start with the basics.

Step One: Understanding the Real Profit — Recasting Financials

Your profit and loss statement (P&L) is a starting point, but it rarely tells the whole story. That’s why buyers, brokers, and valuation professionals recast financials — adjusting your net income to reflect the true earning power of the business.

What is Recasting?

Recasting means taking the reported financials and “adding back” certain expenses to show the normalized cash flow a buyer would expect if they took over the business.

These add-backs fall into a few key categories:

1. Owner’s Compensation

If you’re drawing a salary, paying yourself via distributions, or taking bonuses, these need to be added back if the buyer would replace your role or if the owner’s duties could be outsourced at a lower cost.

Example: You pay yourself $150,000/year as the owner-operator of a plumbing business. A buyer might only need to hire a general manager at $90,000. The $60,000 difference could be adjusted.

2. Personal Expenses Paid by the Business

Many small business owners run some personal expenses through the business. These can often be added back if they’re not essential to business operations.

Common Examples:

• Personal vehicle expenses

• Cell phone plans for family members

• Travel and entertainment

• Meals, memberships, subscriptions

• Home office expenses

⚠️ Caution: Add-backs must be defensible. Not everything can (or should) be included. You’ll want receipts or notes to support any reclassification.

3. One-Time or Non-Recurring Expenses

These are unusual costs that a new buyer wouldn’t expect to incur every year.

Examples:

• Major legal settlements

• Renovations or equipment upgrades

• COVID-related expenses

• Website rebuilds

• Inventory write-offs

These “normalized” numbers give a more accurate picture of what the business generates in discretionary earnings — and that brings us to our next point.

Step Two: Know Your Profit Metric — SDE or EBITDA

Two major terms dominate small business valuation:

Seller’s Discretionary Earnings (SDE)

SDE is typically used for Main Street businesses where the owner is actively involved in day-to-day operations. It includes:

• Net profit

• Owner’s salary

• Add-backs like personal expenses and one-time costs

Think of SDE as: “What an owner-operator can expect to take home annually.”

Most businesses under $5M in revenue are valued using SDE multiples.

Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)

EBITDA is used for larger businesses with management teams in place, especially those over $2M in earnings. It strips out financing and accounting items to show operational profitability.

Think of EBITDA as: “The earnings power of the company, independent of its capital structure.”

Buyers like private equity firms and institutional investors use EBITDA multiples when acquiring companies.

Step Three: Apply an Industry Multiple

Once you have your SDE or EBITDA, the next step is applying a market multiple to estimate the value.

What Is a Multiple?

A multiple is a number (typically between 2.0x and 5.0x for SDE, or 4.0x to 8.0x for EBITDA) that represents how much a buyer is willing to pay per dollar of earnings.

How Multiples Are Determined

Multiples vary based on:

• Size of the business: Larger revenue and profit = higher multiple

• Industry: HVAC, plumbing, and specialty contractors might get higher multiples than restaurants or retail

• Recurring revenue: Subscription or service contracts add value

• Customer concentration: One major client = higher risk

• Owner dependence: If you’re the brand, the value drops

• Books and systems: Clean financials, SOPs, and CRM systems boost value

Contractor Example: Recasting and Valuation

Let’s walk through an example for a contractor:

• Reported net income: $200,000

• Owner’s salary: $120,000

• Personal expenses: $25,000

• One-time legal settlement: $15,000

• True SDE = $200K + $120K + $25K + $15K = $360,000

Let’s say similar businesses are selling at 2.75x SDE.

Valuation: 360,000 x 2.75 = $990,000

Now imagine the same business was larger, doing $4M/year in revenue and had professional management in place. You might switch to an EBITDA-based valuation, with a 5.5x multiple.

Ready for real answers, not just a rough estimate?
Take the next step with a $500 business valuation, personally reviewed by a valuation advisor.
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How to Calculate a Valuation for Your Business — Quickly

If this feels like a lot of math, you're not alone. That’s why tools like the Alta Business Advisors Free Business Valuation Calculator are designed to make the process faster and easier.

This calculator uses inputs like revenue, net profit, industry, and owner compensation to estimate your business’s value based on real-time market data. It’s ideal if you’re wondering:

• How to value a business quickly

• How to calculate how much a business is worth

• What buyers are paying in today’s market

It also gives you an estimated range — showing both conservative and optimistic scenarios based on your industry and financial inputs.

What to Do After You Know Your Valuation

Once you’ve determined a ballpark valuation, you can use it to:

• Plan for a future sale

• Identify areas to improve (e.g., remove personal expenses, grow profit)

• Get a formal valuation if needed (for tax, divorce, partner buyout)

• Start conversations with advisors or brokers

Remember: a valuation is not a listing price. It’s a strategic tool to help you understand your business’s financial reality.

Final Thoughts

Whether you're a blue-collar contractor with a five-person crew or the owner of a multi-location service company, understanding your business’s value is essential. Don’t wait until you're 60 and thinking about selling to ask: How do you calculate the value of a business?

Start by recasting your numbers. Look at your SDE. Compare industry multiples. And if you want a fast, credible starting point, use Alta Business Advisors’ free valuation calculator to see what your business might be worth today.

Or,

Ready for real answers, not just a rough estimate?
Take the next step with a $500 business valuation.
👉 Book Your Valuation Now »