One of the more interesting intellectual problems in owning small businesses is figuring out what they’re actually worth. Not for any immediate transactional reason — I’m not selling anything — but because understanding value changes how you think about investment, improvement, and when to hold versus when to walk away.
The standard answer — a multiple of EBITDA — works at scale. For small owner-operated businesses, it’s almost always wrong.
The owner-operator discount
Most small businesses are worth far less than their revenue or profit might suggest, because the business requires the owner to function. If you’re the sales team, the delivery team, and the quality control team, and you take a month off, the business deteriorates — that’s not a business, it’s a job with overhead.
A self-running business is fundamentally different. It has systems, people, or structures that generate revenue without constant owner intervention. That difference is where the value multiple expands dramatically.
When I evaluate any of my own businesses, the first question is: what happens if I disappear for three months? If the answer is “it mostly runs fine,” I’m looking at a real asset. If the answer is “it collapses,” I’m looking at a consulting contract dressed up as a business.
The earnings I use for valuation
Normalised owner earnings. Not EBITDA — that ignores the cost of replacing the owner’s labour. Not net profit — that often ignores real costs that have been optimised away. Normalised earnings means: what would a buyer actually receive, after paying someone to do what the owner does, with all real expenses captured?
This number is usually lower than owners expect. But it’s the honest number.
The multiple depends on the ceiling
A business with a clear ceiling — geography-constrained, capacity-constrained, regulatory-constrained — gets a lower multiple than one with demonstrable growth potential. A farmhouse that can host 30 guests and is in one location has a hard ceiling. A software product with marginal cost near zero and global reach has an entirely different ceiling.
Most small businesses I see are ceiling-constrained. That’s fine — they can still generate excellent returns on invested capital. But it means 3–5x normalised earnings is often the right range, not 10–15x that founders who’ve been reading too much about startup multiples seem to expect.
What makes a business worth more
In my experience: documented systems, trained staff who can operate independently, a known customer acquisition channel that doesn’t depend on the owner’s personal brand, and recurring revenue or repeat customers who return without being sold to.
Each of these is something you can build deliberately. A business with all four is genuinely more valuable — not in some abstract sense, but because a buyer could actually own it without needing to hire you back as a consultant.
The real reason to think about this
The value of understanding your business’s worth isn’t selling it. It’s improving it. When you know what drives the multiple, you know what to invest in. When you know the normalised earnings, you know whether an investment pays off.
Most business owners never think about this until they need the money. That’s backwards. The time to build a valuable business is before you need to sell one.