TEXAS BUSINESS LAW
How to Value a Business When Buying in Texas
Valuing a business you want to buy comes down to three established approaches — the asset approach, the market approach, and the income approach — cross-checked against the company’s real, normalized earnings. No single number is “the” value; a defensible price is a range produced by more than one method and then adjusted for the specific risks of the business in front of you. This guide explains each approach, the earnings multiples small-business deals actually use, and the adjustments that move the price up or down before you ever sign a purchase agreement.
Valuation drives everything downstream — your offer, your financing, and your due diligence focus — so it’s worth doing with real rigor.
The Three Valuation Approaches
| Approach | What it measures | Best for |
|---|---|---|
| Asset | Net value of assets minus liabilities (often adjusted to market value) | Asset-heavy businesses; a floor value; struggling companies |
| Market | What comparable businesses actually sold for (revenue or earnings multiples) | Businesses with good comparable-sale data |
| Income | The present value of expected future cash flows (capitalization or discounted cash flow) | Stable, cash-generating businesses |
Most real purchases lean on the income and market approaches and use the asset approach as a floor. Running more than one and seeing where they converge — or why they diverge — is the point.
Earnings Multiples for Small Businesses
Small and lower-middle-market deals are usually priced as a multiple of normalized earnings, expressed one of two ways:
- SDE (Seller’s Discretionary Earnings) — used for smaller, owner-operated businesses. It’s net profit with the owner’s salary, perks, interest, taxes, depreciation, and one-time costs added back, capturing the total benefit to a single working owner. Main-street businesses commonly trade at roughly 2–3× SDE, though it varies widely by industry and quality.
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) — used for larger businesses with management in place. Multiples rise with size, growth, and stability.
The multiple is not a fixed industry number — it’s a judgment about risk and growth. A loyal, diversified customer base and clean books push it up; customer concentration and owner-dependence push it down.
Normalize the Earnings First
The multiple is meaningless until the earnings are honest. Before applying any multiple, recast the financials: add back the current owner’s above-market salary and personal expenses, strip out one-time or non-recurring items, and normalize anything priced at non-market rates (for example, below-market rent from a landlord who is also the seller). A seller’s headline “profit” and the true, transferable earnings a buyer will inherit are often very different numbers.
Adjustments That Change the Price
Two businesses with identical earnings are not worth the same. Discount for customer concentration (one client at 40% of revenue is a serious risk), owner dependence (does the business walk out the door with the seller?), declining trends, deferred maintenance, and lease or license transfer risk. Add for diversified revenue, recurring contracts, documented systems, and a management team that stays. These qualitative factors often move value more than a tenth of a turn on the multiple.
Why Deal Structure Affects Value
The same business can be worth different amounts depending on how the deal is structured. An asset purchase versus a stock purchase changes the buyer’s tax basis and which liabilities transfer — both of which affect what a buyer can rationally pay. Value and structure are decided together, not in sequence.
Frequently Asked Questions
What are the three main methods of valuing a business?
The asset approach (net value of assets and liabilities), the market approach (multiples from comparable sales), and the income approach (present value of future cash flows). A sound valuation uses more than one and looks at where they agree.
What is a typical multiple for a small business?
Smaller owner-operated businesses are often valued at roughly 2–3 times Seller’s Discretionary Earnings (SDE), though the multiple varies widely by industry, size, growth, and risk. Larger businesses are valued on an EBITDA multiple that rises with size and stability.
What is SDE and why does it matter?
Seller’s Discretionary Earnings is net profit with the owner’s salary, perks, and one-time costs added back. It reflects the total financial benefit to a single owner-operator and is the standard earnings base for valuing small businesses.
Why is normalizing earnings important?
Reported profit often includes the owner’s discretionary spending, one-time items, and non-market arrangements. Normalizing (recasting) the financials reveals the true transferable earnings a buyer will actually inherit — the only honest basis for a multiple.
A credible valuation is the foundation of a smart purchase and your strongest negotiating tool. Reidel Law Firm guides buyers through valuation, due diligence, and closing on a flat-fee basis. Get help buying a business in Texas.
