Whether you are buying or selling, understanding how businesses are valued in British Columbia is fundamental to making informed decisions. Three primary methods are used in most small and mid-market transactions.
Seller Discretionary Earnings (SDE) Multiple
The most common method for small businesses. SDE represents the total financial benefit to a single owner-operator, calculated by adding net income, owner salary, personal expenses run through the business, interest, depreciation, and one-time costs. The SDE is then multiplied by an industry-specific factor — typically between 1.5x and 3.5x for most BC small businesses.
Asset-Based Valuation
This method values the business based on its tangible and intangible assets minus liabilities. It is particularly relevant for asset-heavy businesses like manufacturing, construction, or businesses being sold primarily for their equipment and inventory.
Market Comparables
By examining recent sales of similar businesses in the same industry and region, you can establish a realistic market value range. This method requires access to transaction databases and an understanding of how to adjust for differences between comparable sales and the subject business.
Which Method to Use
Most transactions use a combination of approaches. A restaurant might be valued primarily on SDE multiples but cross-checked against recent comparable sales. An industrial business might lean more heavily on asset valuation. The right approach depends on the business type, industry norms, and the specific circumstances of the transaction.
Common Valuation Mistakes
Overvaluing based on revenue alone, ignoring the impact of lease terms on value, failing to normalize owner compensation, and using outdated comparables are the most frequent errors. Working with a professional who understands BC market conditions helps avoid these pitfalls.