Key takeaways
- Owner-operated businesses are valued on seller's discretionary earnings, larger companies with a management layer on EBITDA, and the two are not interchangeable.
- A multiple is a measure of risk, so anything that makes the earnings more likely to continue without you raises it.
- Every add-back must be documented, because one that fails due diligence weakens all the others.
- A valuation is a diagnosis as much as a number, and most weak drivers can be fixed in 12 to 36 months.
Every owner we meet in British Columbia has a number in mind. It usually comes from a neighbour's sale, an industry rumour or a tax return read optimistically. A valuation replaces that number with one a buyer and a lender will accept, and it shows you why the number is what it is.
This guide explains how we build a valuation at BizSell.ca, what the two main earnings measures mean, where multiples come from and, most usefully, which parts of the result you can still change before you go to market. Read it before you talk to a buyer, and read it with your CPA beside you.
Start with the right earnings measure
Small business valuation in Canada rests on one of two earnings figures. Seller's discretionary earnings (SDE) is the total financial benefit one working owner takes from the business. It starts with pre-tax profit and adds back the owner's salary, the owner's personal expenses run through the company, interest, depreciation and genuinely one-time costs. SDE suits businesses where a single owner-operator runs the show and the buyer will step into that seat.
EBITDA (earnings before interest, taxes, depreciation and amortisation) assumes the business pays a market salary to whoever manages it. It is the measure used for larger companies with a management layer, and it is the one lenders and lower mid-market buyers quote. The same business will show a higher SDE than EBITDA, because EBITDA deducts a manager's wage. Knowing which figure your type of buyer uses stops you comparing your business against the wrong benchmark.
Normalising the numbers honestly
A buyer does not value your tax return. They value the earnings the business would produce under new ownership. Normalising means adjusting the statements to show that. Legitimate add-backs include an owner's above-market salary, family members on payroll who do not work in the business, personal vehicles, travel that was really a holiday, and a lawsuit settled once. Legitimate deductions include the market salary a replacement manager would need, rent at market rate if you own the building, and repairs you have deferred.
Every add-back must be documented. A buyer's accountant will test each one, and an add-back that fails costs you credibility on all the others. We prepare the schedule with your CPA so the numbers survive due diligence rather than collapse inside it.
Where the multiple comes from
A multiple is simply the price divided by the earnings measure. It expresses how many years of earnings a buyer will pay for today, which is another way of expressing risk. The more confident a buyer is that the earnings will continue without you, the more years they will pay for. Owner-dependent businesses valued on SDE trade on lower multiples than businesses with a management team valued on EBITDA, because the buyer in the second case is buying a system rather than a job.
Multiples come from comparable transactions in your industry and size band, adjusted for the specific facts of your company. We do not publish industry multiples in this guide because a figure without context misleads more than it informs. In the report we show you the comparables we used and the adjustments we made to them.
What moves the multiple up or down
The drivers below are the ones we test on every file. None of them is about the industry. All of them are about how much of the business leaves with you.
- Customer concentration, where one customer carrying a large share of revenue pulls the multiple down sharply
- Recurring or contracted revenue, such as service agreements and subscriptions, which lifts it
- Owner dependence, best measured by what breaks when you take a month off
- Clean financial statements for three full years, ideally reviewed or audited
- Trend direction, since a buyer pays for the next three years rather than the last three
- Transferable licences, leases and supplier agreements with time left on them
- Documented systems, so a buyer can see how work gets done without asking you
Three methods, and why we run all of them
Our BizSell.ca valuation applies three methods: discounted cash flow, market multiples and an asset-based approach. Discounted cash flow tests what the future earnings are worth today at a rate that reflects the risk of receiving them. Market multiples anchor the result to what buyers have actually paid for similar companies. The asset-based method sets a floor, which matters for equipment-heavy businesses and for companies whose earnings are weak.
When the three methods disagree, the gap itself tells you something, usually that the business is worth more as a going concern than its assets, or the reverse. The report runs 25 to 35 pages, shows normalised EBITDA and SDE side by side, and costs $3,500 flat.
What to do with the result
A valuation is a starting point, not a listing price. If the number disappoints, the report shows which drivers are weak, and the fix for most of them takes 12 to 36 months. If the number pleases you, the report becomes the backbone of the buyer package and the document your lender and your CPA work from.
Either way, do not go to market on a guess. Ali has sat on both sides of these conversations, and the seller who knows the number, and why it is the number, keeps control of the negotiation from the first meeting to closing. Call or text (604) 632-4959 when you want the conversation to start with facts.