5 Exit Paths — Which One Fits Your Business?
Third-Party Sale
Family Succession
Management Buyout (MBO)
Employee Stock Ownership Plan (ESOP)
Strategic Acquisition / Merger
Orderly Liquidation
How to Value Your Small Business
The most common valuation method for businesses under $5M in revenue is a multiple of Seller's Discretionary Earnings (SDE).
| Industry | Typical SDE Multiple | EBITDA Multiple (for $2M+ EBITDA) | Key Value Drivers |
|---|---|---|---|
| Software / SaaS | 3.0–6.0× | 6–15× | MRR, churn rate, growth rate |
| Professional Services (accounting, law) | 1.0–2.5× | 4–7× | Client transferability, staff retention |
| Healthcare / Medical Practice | 1.5–3.5× | 4–8× | Payor mix, license transferability |
| HVAC / Plumbing / Electrical | 2.0–3.5× | 4–6× | Service contracts, equipment, crew tenure |
| Restaurant (independent) | 1.0–2.0× | 3–5× | Location, lease terms, concept uniqueness |
| Retail (physical) | 1.0–2.5× | 3–5× | Inventory quality, lease terms, brand recognition |
| Manufacturing | 2.0–4.0× | 4–8× | Customer diversity, equipment condition, proprietary products |
| Transportation / Trucking | 1.5–3.0× | 3–6× | Fleet condition, contracts, driver relationships |
| Staffing / Temp Agency | 0.8–1.5× | 3–5× | Client contract transferability |
| E-commerce | 2.0–4.0× | 4–8× | Traffic quality, AOV, product moat |
Asset Sale vs. Stock Sale — Tax Consequences
Asset Sale (Most Common)
- Buyer purchases specific assets — not the entity
- Seller retains the legal entity (LLC or Corp)
- Assets allocated to price: inventory, AR, equipment, goodwill, customer list, non-compete
- Seller tax: portion of goodwill at capital gains rate; equipment and inventory may trigger ordinary income and depreciation recapture
- Buyer advantage: "step-up" in basis — buyer can depreciate assets from purchase price, not seller's original cost
- C-Corp asset sale: double taxation — Corp pays tax on gain, then shareholders pay tax on dividends
Stock / Membership Interest Sale
- Buyer purchases owner's shares or membership interest
- Buyer inherits the entity including all liabilities
- Seller pays capital gains tax on the difference between sale price and basis
- Long-term capital gains rate: 0%, 15%, or 20% depending on income (much lower than ordinary income)
- Buyer disadvantage: no step-up in basis — inherits seller's depreciation schedule
- Most sellers prefer stock sale; most buyers prefer asset sale — structure is negotiated
Seller Financing — What It Is and When to Use It
Seller financing means you, the seller, act as the bank for part of the purchase price. The buyer pays you a down payment, signs a promissory note for the remainder, and makes monthly payments to you over 3–7 years. A lien on the business assets secures the note.
Typical seller financing structure: Buyer puts 10–30% down → SBA 7(a) finances 50–70% → Seller carries 10–20% as a seller note (often on standby for the first 2 years of the SBA loan per SBA subordination requirements).
Why sellers offer financing: It closes deals that might not otherwise close, signals confidence in the business to the buyer (and the SBA), and allows sellers to spread tax liability over multiple years through installment sale treatment (IRS Form 6252) — potentially keeping each year's gain in a lower tax bracket.
Interest rate on seller notes: The IRS establishes Applicable Federal Rates (AFR) — the minimum interest rate for private loans to avoid imputed interest. In 2026, mid-term AFR is approximately 4–5%. Most seller notes carry 6–8% interest.
SBA 7(a) for Business Acquisitions
The majority of small business acquisitions under $5M are financed using SBA 7(a) loans. This is so common that business brokers and M&A attorneys treat SBA loan approval as the default assumption for buyer financing.
- Maximum loan amount: $5 million
- Down payment: 10–15% (on well-qualified deals with strong cash flow history)
- DSCR requirement: Post-acquisition, the business must demonstrate DSCR of 1.25× — covering debt service from business cash flow alone
- Timeline: 45–90 days from application to closing
- Buyer qualification: 680+ FICO, relevant industry experience (or equivalent management experience), personal financial statement, personal guarantee
- Business qualification: 2+ years in business (the target company, not the buyer), positive cash flow for 2+ years, clean books, no significant undisclosed liabilities
- Business appraisal: SBA requires a business valuation for any acquisition over $250,000 — performed by a credentialed Business Valuator (CVA, CBA, ABV)
12 Steps to Maximize Your Sale Price Before Listing
Start 24 months before your target sale date
Most value-building changes take 12–24 months to appear in your financial history — and buyers and lenders look at 2–3 years of financials. Decisions made 6 months before listing rarely affect your sale price.
Get 3 years of clean, CPA-reviewed financial statements
Internally prepared financials reduce buyer confidence and invite lower offers. Compiled or reviewed statements from a CPA signal that the numbers are reliable. Audited statements command the highest buyer confidence for larger transactions.
Normalize (recast) your earnings
Add back: owner salary above market, personal expenses run through the business, one-time legal or restructuring costs, and non-cash depreciation. This is the SDE "add-back" process — buyers and their accountants will do this anyway; you should control the narrative and have supporting documentation for each add-back.
Reduce customer concentration
If one client is 30%+ of revenue, buyers see an acquisition risk: what if that client leaves after the sale? Add new clients to reduce concentration below 15% per customer before listing.
Document your systems and processes
Write SOPs (standard operating procedures) for all key business functions. A business that runs without the owner on a day-to-day basis commands a higher multiple than one where all knowledge is in the owner's head. SOP documentation is a direct multiplier on valuation.
Transition key customer relationships to staff
If your top 10 clients call your personal cell for all service and account questions, a buyer's first concern is whether those clients will follow you out the door. Introduce key clients to your team at least 12 months before sale.
Resolve all outstanding legal, regulatory, and HR issues
Any pending lawsuit, OSHA violation, IRS dispute, employment claim, or environmental liability will appear in due diligence and be used to reduce price or kill the deal. Resolve or disclose proactively — never hide material issues.
Renew or extend key contracts and leases
A lease expiring 18 months from now is a negotiation problem for a buyer. A lease with 7 years remaining is an asset. Same with supplier contracts, key customer contracts, and licensing agreements. Extend everything you can before listing.
Optimize your personal compensation for the last 2 years
Owner salary and benefits are added back to calculate SDE — but only with documentation. Work with your CPA to ensure your total compensation (salary, benefits, vehicle, retirement contributions) is properly documented for add-back purposes.
Consider professional representation (business broker or M&A advisor)
Business brokers typically charge 8–12% commission for deals under $1M; 5–8% for deals $1M–$5M; M&A advisors often use Lehman formula (5% of first $1M, 4% of second, etc.) for larger deals. They access a wider buyer pool, maintain confidentiality during the process, and typically increase net proceeds beyond their fee.
Get a pre-sale business valuation
A professional appraisal before listing does three things: reveals your likely sale price so you can plan financially, identifies specific value drivers to improve before listing, and gives you a credible basis for price discussions with buyers. Valuations for businesses under $5M typically cost $2,500–$10,000.
Plan your personal post-sale finances
What will you do with the proceeds? How much will taxes take? Will you need income after the sale? Coordinate with a financial planner and your CPA at least 12 months before closing. Timing and structure decisions made at or after closing may cost you 10–20% of net proceeds in avoidable taxes.
Frequently Asked Questions
- How do you value a small business for sale?
- Most small businesses (under $5M revenue) are valued using Seller's Discretionary Earnings (SDE): SDE = net income + owner salary and benefits + depreciation + amortization + interest + one-time non-recurring expenses. SDE multiples range 1.0× to 6.0× depending on industry, size, profitability, growth trajectory, customer concentration, and owner-dependency. Businesses over $2M EBITDA are typically valued on EBITDA multiples (4–8×+). Professional services typically trade at 1.0–2.5× SDE; software/SaaS 3.0–6.0× SDE; trades (HVAC, plumbing) 2.0–3.5× SDE. Get a professional appraisal before listing — a credentialed Business Valuator charges $2,500–$10,000 and typically increases net proceeds by far more than the cost.
- What is the difference between an asset sale and a stock sale?
- Asset sale: buyer purchases specific assets (equipment, inventory, goodwill, client list, trade name) — not the legal entity. Seller retains the entity. Buyer gets step-up in asset basis (better tax treatment for buyer). Seller may have ordinary income exposure on some assets (depreciation recapture on equipment). Stock/membership interest sale: buyer purchases owner's shares or LLC membership interest, inheriting the whole entity including all liabilities. Seller pays capital gains tax (0%, 15%, or 20%) on proceeds — much more favorable than ordinary income rates. Most sellers prefer stock sales; most buyers prefer asset sales. Structure is negotiated. Most small business transactions under $1M are asset sales.
- How long does it take to sell a small business?
- Average time from listing to close: 6–12 months. Breakdown: 1–3 months to prepare (recast financials, information memorandum), 1–2 months to market and qualify buyers, 2–4 months of buyer due diligence plus SBA loan approval if buyer uses SBA financing, 1–2 months to negotiate and close purchase agreement. Businesses with clean books, documented systems, diversified customers, and reduced owner-dependency sell faster and at higher multiples. Businesses that need clean-up before listing should budget 12–24 months total from decision to close.