Small business valuation in Canada: the three methods and the one buyers use

To value a small business in Canada, multiply its adjusted earnings by the range buyers pay in its industry, usually two to seven times, then adjust for size and risk. That earnings multiple is the method buyers of owner operated businesses use. Asset value sets a floor, and discounted cash flow handles businesses whose future will differ from their past.

Three methods, and which one applies to you

Small business valuation in Canada uses three methods, set out below. Professional valuators work all three and reconcile them. Buyers of owner operated businesses rely on the first, a multiple of adjusted earnings, so that is the one to learn if you want to know how to value a business you might sell.

The earnings multiple, step by step

1. 01Start with the profit on the statements for the last full year, and look at the two before it.
2. 02Add back what stays with you: your salary and benefits, interest and depreciation, and the one off or personal costs run through the business. The result is adjusted earnings, sometimes called seller’s discretionary earnings. SDE or EBITDA explains which version of this number applies to you. In a dental practice, part of that salary pays for dentistry the owner performs, and a buyer who must hire a dentist for that work deducts the cost first.
3. 03Find your industry’s range. Owner operated businesses in Canada sell for roughly two to seven times adjusted earnings, and the ranges by industry are narrower than that. Some industries are also priced on revenue: insurance brokerages on their book of commission income, and small accounting practices on their annual fees.
4. 04Move within the range for size, customer concentration, how the business runs while you are away, and how much revenue repeats. Size moves the multiple by up to a full turn, meaning one times earnings, and each of the others by up to about half a turn.
5. 05Multiply. The result is a range, and the range is the honest answer.

The free quick valuation gives a first range from your website and revenue band. The AI Valuation tool runs these five steps on your statements and shows the reasoning behind each number. Both are listed with the other free tools.

A worked example

A home services business with $1.2 million of revenue shows $260,000 of profit after paying its owner $150,000 and writing off a $40,000 truck. One customer is 12 percent of revenue, a foreman runs the crews, and about half the revenue is maintenance contracts.

That is a wide range, and it is meant to be. Where in it the business lands depends on which buyers see it and what they can do with it, and the sale settles that once the valuation is done.

When the other two methods matter

The asset method sets a floor. If your equipment and inventory would fetch more than the earnings multiple gives, something is wrong with the earnings, and a buyer will price the assets and treat the business as a bonus. The resale value of a trucking company’s fleet tends to set that floor, and kitchen equipment does the same when a restaurant sells on thin earnings.

Discounted cash flow matters when the past is a poor guide, such as a business that has just signed a contract that doubles it or lost one that halves it. A main product newly on the US tariff lists is another such case. It is also what a professional valuator will produce for tax, litigation or a shareholder dispute, and it is the method banks and courts expect in those settings.

What a valuation misses

A method applied to statements misses things a buyer will find. The competitor who would pay above the range for your customer list is invisible on paper, and so is a lease that runs out in eighteen months or a largest customer who happens to be your brother in law. A buyer sees those and prices them, and an advisor’s job is to find them first.

It also misses the market on the day. Two buyers who both want a business pay more than one buyer who knows they are alone. A valuation tells you the conversation you are having; the sale decides the number.

Two things to remember

• Ask which number a multiple is applied to before you react to it. Most published multiples come from larger American companies and are quoted against EBITDA, so they overstate what an owner operated Canadian business will fetch.
• A formal valuation for tax or legal purposes is a paid engagement by a chartered business valuator, and it is a different document from the range a buyer will pay. Both are useful. They answer different questions.

If the range falls short of what you need, preparing a business for sale covers the changes that move it, and when to sell a business covers how long they take to show.

Questions owners ask

What is the simplest way to value a small business?

Multiply adjusted earnings by an industry multiple. Take the profit, add back the owner’s salary, depreciation, interest and one off costs, and multiply by the range buyers pay in your industry, which for most owner operated Canadian businesses is between two and seven.

Do I need a professional valuation to sell my business?

A sale can go ahead on the earnings multiple alone, because buyers price on that and on their own diligence. A formal valuation by a chartered business valuator is needed for tax planning and for legal settings such as a shareholder dispute, a divorce or a court case. It is a different document from the range a buyer will pay.

Why is my business worth less than the multiples I read online?

Those multiples usually come from far larger American companies and are quoted against EBITDA. An owner operated Canadian business is priced against adjusted earnings, which include the owner’s pay, so the multiple is lower even when the price is comparable.