How to Calculate How Much Your Business Is Worth

Key Takeaways

• Seller's Discretionary Earnings (SDE) is the most common starting point for small business valuations in Canada. If your SDE is $300,000 and your industry multiple is 2.5x, your business is worth $750,000.
• Customer concentration, owner dependency, and messy books compress your multiple. Address these before you're at the table.
• Canadian owners selling qualifying small business corporation shares may shelter up to $1.25M (2024) from tax under the LCGE. This requires planning well before a sale.
• You don't need to be planning to sell to know your number. It tells you where to focus to make the business more valuable.
• Clean, well-organized financials directly increase what buyers will pay. Buyers build uncertainty discounts into messy books.

Most business owners have spent years building something real. But ask them what it's worth and they'll give you a range, a feeling, or a comparison to someone they heard about at a conference.

When a buyer shows up, they don't work from feelings. They run a formula. If you're not running the same formula, you're negotiating blind.

Here's how Canadian buyers actually calculate business value, and what you can do to own that number before they do.

How Buyers Calculate Value: SDE, EBITDA, and Assets

Not every business is valued the same way. The method depends on the size and type of business.

Seller's Discretionary Earnings (SDE): for businesses under $5M in revenue

SDE is the total financial benefit the owner gets from the business: net income plus owner salary, plus any personal expenses run through the company, plus non-cash items like depreciation. It represents the total economic benefit the owner derives from the business, assuming the buyer will replace the owner’s role and expenses. It's the most common starting point for small business valuations in Canada.

SDE = Net profit + Owner salary + Add-backs

A buyer applies a multiple to that SDE number. For Canadian small businesses, multiples typically range from about 1.5x to 3.5x for many industries, though some sectors (e.g., restaurants, service trades) commonly trade at the lower end, and more predictable or recurring‑revenue businesses at the higher end.

EBITDA multiples: for businesses over $2M in earnings

EBITDA (earnings before interest, taxes, depreciation, and amortization) is the standard for larger businesses. Canadian SMBs in the $2M to $10M EBITDA range typically trade at 4x to 7x, depending on the sector and growth trajectory.

Asset-based valuation: when assets are the primary value

Used when the income stream is low but the assets are valuable: real estate-heavy businesses, equipment-intensive operations, or businesses being wound down. The value is fair market value of assets minus liabilities.

What Moves Your Multiple

The multiple isn't fixed. Buyers adjust it based on risk. These factors push it down:

Owner dependency: If the business can't function without you, buyers discount heavily. They're buying a business, not a job. The solution is documented processes, trained staff, and a clear transition plan.

Customer concentration: If one or two clients represent 30% or more of your revenue, a buyer could lose that revenue on day one. High concentration equals lower multiple.

Messy books: Every unexplained variance or inconsistency forces a buyer to build in an uncertainty discount. Clean, reconciled financials signal a business that runs properly.

These factors push it up:

Recurring revenue: Retainers, subscriptions, and long-term contracts are worth more than project-based work. Predictable cash flow commands a premium.

Growth trajectory: A business growing 20% per year trades at a higher multiple than a flat one, even with the same current earnings.

Documented systems: If your team knows what to do without asking you, the business transfers cleanly.

What This Looks Like: Derek's HVAC Business

Derek runs an HVAC company in Ontario doing $1.8M in revenue. His net income after paying himself $120,000 is $180,000. After adding back personal vehicle use, phone, and a one-time equipment write-off, his adjusted SDE is $320,000.

The industry multiple for HVAC in Canada is roughly 2x to 3x. But 60% of Derek's revenue comes from two commercial building contracts. A buyer prices that concentration risk and offers at 2x: $640,000.

If Derek spends two years diversifying so no single client exceeds 20% of revenue, and documents his technician processes so the business runs without him, a buyer would pay 3x to 3.5x. That's $960,000 to $1.1M for the same underlying business.

The difference is $320,000 to $460,000. It starts with Derek knowing his number today.

The LCGE: How Canadian Owners Can Shelter Up to $1.25M

Canadian business owners have a significant tax advantage when selling qualifying small business corporation shares. The Lifetime Capital Gains Exemption (LCGE) can shelter up to $1.25M (2024‑$1.25M indexed; current indexed amount) of eligible capital gains from tax entirely, assuming the shares qualify and the exemption has not already been used. This is a lifetime exemption per person, not per business.

To qualify, the shares must meet several tests: the small business corporation test (90% or more of assets used in active business in Canada at the time of sale), and the shares must have been held for at least 24 months. Your Mesa CPA advisor needs to assess LCGE eligibility well before a sale, not during the transaction.

If the LCGE applies, $1.25M in capital gains could mean zero tax on that amount. That is a planning opportunity, not a guarantee. Start the conversation early.

Why This Matters

You don't need to be actively planning to sell to care about this number. Your valuation tells you where your leverage points are, what to fix first, and where you'd get discounted in a sale.

A business that could sell at 3x but is currently running at 1.5x is leaving real money behind, not hypothetically, but in the actual multiple a buyer would offer today. The fix usually takes 12 to 24 months, which means you need the number now.

If you're thinking about a sale in the next two to five years, or just want to know what your number is today, your Mesa CPA advisor can calculate your current SDE and identify the biggest factors affecting your multiple. Start the conversation before you're mid-negotiation.

Frequently Asked Questions

Do I need a formal valuation, or can I calculate it myself?

For planning purposes, you can estimate using SDE or EBITDA multiples and industry benchmarks. For an actual transaction, a certified business valuator (CBV) produces a formal report buyers and lenders will accept. Many buyers require one, and it gives you a defensible number to negotiate from.

How do I find the typical multiple for my industry?

Industry multiples are tracked by business broker associations and transaction databases. Your Mesa CPA advisor can give you a range based on recent comparable transactions in your sector.

What if my business isn't incorporated?

Sole proprietors and partnerships sell assets rather than shares, which means the LCGE doesn't apply. Incorporating at least two years before a sale can unlock significant tax advantages. Talk to your Mesa CPA advisor about whether and when incorporation makes sense for your situation.

What will a buyer's accountant actually look at?

During due diligence, buyers will want two to three years of financial statements, tax returns, bank statements, major customer contracts, and an explanation of any significant one-time items. This is exactly why clean, consistent records directly increase what you can sell for.