Understanding Business Valuation for SBA Acquisitions
When you’re buying a business with an SBA loan, valuation isn’t just an academic exercise — it directly determines how much a lender will finance, how much equity you need to inject, and whether the deal pencils out financially.
SBA lenders don’t accept a seller’s asking price at face value. They want to see that the purchase price is supported by recognized valuation methods and, in many cases, by a formal third-party appraisal. Understanding these methods gives you the knowledge to evaluate deals, negotiate effectively, and present a compelling case to your lender.
At GoSBA Loans, we’ve facilitated over $320 million in SBA funding in 2025 through our network of 50+ lenders. This guide breaks down every valuation method that matters for SBA acquisitions — and explains what lenders actually accept.
Discounted Cash Flow (DCF) Method
The Discounted Cash Flow method values a business based on its projected future cash flows, discounted back to present value. It answers the question: “What is the right to receive this business’s future cash flows worth today?”
How DCF Works
- Project future cash flows: Estimate the business’s free cash flow for the next 5-10 years based on historical performance and reasonable growth assumptions.
- Determine the discount rate: This rate reflects the risk of the investment. Higher risk = higher discount rate = lower present value. For small businesses, discount rates typically range from 15-30%.
- Calculate terminal value: Estimate the business’s value at the end of the projection period (what someone would pay for it in year 5 or 10).
- Discount everything to present value: Apply the discount rate to bring future cash flows and the terminal value back to today’s dollars.
DCF Strengths
- Accounts for the time value of money
- Forward-looking — considers growth potential
- Customizable to specific business characteristics
- Recognized by the IRS and professional appraisers
DCF Limitations for SBA Deals
- Projection-dependent: Small businesses often have volatile earnings, making projections unreliable.
- Subjective inputs: The discount rate and growth assumptions significantly affect the result — small changes create large swings in value.
- Complexity: Most small business buyers and sellers don’t have the expertise to build a proper DCF model.
- Lender skepticism: SBA lenders prefer valuation methods grounded in historical performance rather than projections.
Bottom line: DCF is a valid method, but it’s rarely the primary valuation approach for SBA-sized acquisitions. It’s more commonly used as a secondary check or for businesses with strong, predictable cash flows.
Comparable Transactions / Market Approach
The market approach values a business by comparing it to similar businesses that have recently sold. It’s the same concept as real estate “comps” — what did similar properties sell for?
How the Market Approach Works
- Identify comparable transactions: Find businesses in the same industry, of similar size, in the same geographic region that have recently been sold.
- Analyze sale multiples: Calculate the SDE or EBITDA multiples at which those businesses sold.
- Apply the multiples: Apply the comparable multiples to your target business’s earnings to estimate its value.
Where to Find Comparable Sales Data
- BizBuySell: Publishes quarterly insight reports with median sale prices and multiples by industry.
- DealStats (formerly Pratt’s Stats): A comprehensive database of completed business sales used by professional appraisers.
- Business brokers: Experienced brokers in your industry often have proprietary data on recent sales.
- IBBA / M&A Source: Industry associations that track market data.
Market Approach Strengths
- Based on real-world market data — what buyers actually paid
- Easy for lenders and buyers to understand
- Less subjective than DCF
- Widely accepted by SBA lenders
Market Approach Limitations
- Data availability: Small business sales are often private, making it hard to find truly comparable transactions.
- No two businesses are identical: Differences in geography, customer base, growth trajectory, and owner involvement make direct comparisons imperfect.
- Outdated data: Market conditions change, and sales data from 2-3 years ago may not reflect current valuations.
Asset-Based Approach
The asset-based approach calculates business value based on the company’s net assets — what it owns minus what it owes.
Two Variations
Going-Concern Asset Approach:
- Values assets at their fair market value assuming the business continues operating
- Includes tangible assets (equipment, inventory, real estate) and identifiable intangible assets (patents, trademarks, customer lists)
- Subtracts all liabilities
Liquidation Value Approach:
- Values assets at what they would sell for if the business were shut down and assets sold individually
- Typically produces the lowest valuation
- Used as a “floor value” — the minimum the business is worth
When Asset-Based Valuation Makes Sense
- Asset-heavy businesses (manufacturing, distribution, construction)
- Businesses with significant real estate holdings
- Companies that are not consistently profitable
- As a secondary check against income-based methods
Limitations for SBA Acquisitions
- Doesn’t capture earning power or growth potential
- Undervalues service businesses and businesses with significant goodwill
- SBA lenders primarily care about cash flow, not asset values
Rule of Thumb Multiples by Industry
Rule of thumb multiples are industry-specific guidelines that provide a quick, rough estimate of business value. They’re not a substitute for a proper valuation, but they’re useful for initial screening and sanity checks.
Common Rule of Thumb Multiples
- Accounting practices: 1.0x – 1.5x annual revenue
- Auto repair shops: 2.0x – 3.0x SDE + inventory
- Commercial cleaning: 2.0x – 3.0x SDE
- Dental practices: 60-80% of annual revenue
- E-commerce businesses: 2.5x – 4.0x SDE
- HVAC companies: 2.0x – 3.5x SDE
- Insurance agencies: 1.5x – 2.5x annual commissions
- Landscaping companies: 1.5x – 2.5x SDE
- Manufacturing: 3.0x – 5.0x EBITDA
- Plumbing companies: 2.0x – 3.0x SDE
- Restaurants (full-service): 30-45% of annual revenue or 2.0x – 3.0x SDE
- Staffing agencies: 2.0x – 4.0x SDE
- Veterinary practices: 60-90% of annual revenue
Important caveat: These are broad ranges. The actual multiple for any specific business depends on dozens of factors including growth rate, profitability, customer concentration, owner dependency, and local market conditions.
How to Use Rule of Thumb Multiples
- Initial screening: Quickly assess whether an asking price is in the right ballpark before investing time in detailed analysis.
- Negotiation anchor: Reference industry norms when discussing price with sellers.
- Sanity check: If your detailed valuation produces a result far outside the rule of thumb range, investigate why.
What SBA Lenders Actually Accept: Third-Party Valuations vs. Broker Opinions
This is where the rubber meets the road. Regardless of how you and the seller agree on a price, your SBA lender needs to be satisfied that the valuation is reasonable.
Third-Party Business Valuations
A formal third-party valuation is conducted by a qualified appraiser — typically someone with credentials like ASA (American Society of Appraisers), ABV (Accredited in Business Valuation), or CVA (Certified Valuation Analyst).
When SBA lenders require a third-party valuation:
- Purchase price exceeds $250,000-$500,000 (threshold varies by lender)
- Significant goodwill is involved (intangible value exceeds tangible assets)
- The deal structure is unusual or complex
- The lender’s internal policies require it
What a formal valuation includes:
- Multiple valuation methods (income, market, and/or asset approaches)
- Detailed analysis of financial statements
- Industry and economic analysis
- A conclusion of value with supporting rationale
Cost: Professional business valuations typically cost $3,000-$10,000 depending on the complexity of the business. This is usually paid by the buyer.
Broker’s Opinion of Value (BOV)
A broker’s opinion of value is a less formal assessment provided by a business broker, typically based on their experience selling similar businesses.
- Less rigorous than a formal valuation
- Less expensive (often $500-$2,000 or included in the broker’s listing services)
- May have bias — the broker representing the seller has an incentive to support a higher price
SBA lender acceptance: Some lenders accept a broker’s opinion for smaller deals, but many prefer or require a formal third-party valuation, especially when goodwill exceeds certain thresholds. It’s essential to check with your lender early about their specific requirements.
What Lenders Really Care About
Regardless of the valuation method used, SBA lenders focus on these key factors:
- Cash flow sufficiency: Can the business service the debt? (DSCR of 1.25x minimum)
- Reasonableness of goodwill: Is the intangible value justified by the earnings history?
- Historical consistency: Are the financials stable and verifiable?
- Collateral coverage: What’s the liquidation value of the business assets relative to the loan amount?
Choosing the Right Valuation Approach for Your Deal
In practice, the best approach combines multiple methods:
- Start with an income-based valuation (SDE or EBITDA × industry multiple) as your primary method.
- Cross-check with comparable transactions to see if the result aligns with market data.
- Use asset-based valuation as a floor — especially for asset-heavy businesses.
- Apply rule of thumb multiples as a quick sanity check.
- Get a professional valuation if required by your lender or if the deal is complex.
This multi-method approach gives you confidence in your pricing and strengthens your position with both the seller and your lender.
Get Expert Valuation Support with GoSBA — Completely Free
Navigating business valuation methods can be complex, but you don’t have to do it alone. At GoSBA Loans, our service is completely free to borrowers. We provide:
- Professional business plans and financial projections valued at $2,500-$5,000 — at no cost to you — that support your valuation analysis
- Access to 50+ SBA lenders so you know exactly what each lender requires for valuation
- Deal structuring guidance to ensure your purchase price is supportable and financeable
- Over $320 million funded in 2025 — we’ve seen what works and what doesn’t
Contact GoSBA today for a free consultation and let us help you value, structure, and finance your business acquisition the right way.
