Last updated: 2026-02-19
How to Value a Small Business in India
The most common way to value a small business in India is using a multiple of annual profit—typically 2-4x Seller's Discretionary Earnings (SDE) for businesses under ₹2 crore and 3-5x EBITDA for larger companies.
How do you value a small business in India?
Small business valuation in India primarily uses the income approach, calculating value as annual profit multiplied by an appropriate multiple based on industry, risk factors, and growth potential. A business generating ₹25 lakh annual profit with a 3x multiple would be valued at approximately ₹75 lakh.
| Business Profit (Annual) | Typical Multiple | Estimated Value Range |
|---|---|---|
| ₹5 lakh | 1.5-2.5x | ₹7.5-12.5 lakh |
| ₹10 lakh | 2-3x | ₹20-30 lakh |
| ₹25 lakh | 2.5-3.5x | ₹62.5-87.5 lakh |
| ₹50 lakh | 3-4x | ₹1.5-2 crore |
| ₹1 crore | 3.5-5x | ₹3.5-5 crore |
Key Insight
Small businesses in India typically sell for 2-4x annual profit — significantly lower than the 4-6x multiples common in the US. This creates opportunity for buyers who can source deals effectively.
What is Seller's Discretionary Earnings (SDE)?
Seller's Discretionary Earnings (SDE) is the total annual financial benefit a full-time owner-operator derives from a business, calculated by adding net profit, owner's salary, owner's perks, and non-cash expenses like depreciation. SDE is the standard profit measure for valuing owner-operated small businesses.
SDE Calculation Example:
| Net Profit (as reported) | ₹8,00,000 |
| + Owner's salary | ₹6,00,000 |
| + Owner's car expenses | ₹1,50,000 |
| + Personal phone/internet | ₹30,000 |
| + Depreciation | ₹2,00,000 |
| + One-time legal expense | ₹75,000 |
| - Market-rate manager salary | (₹3,60,000) |
| = Adjusted SDE | ₹14,95,000 |
What multiple should you pay for a business in India?
The appropriate multiple depends on industry, growth rate, owner dependency, customer concentration, and competitive position—typically ranging from 2x for risky owner-dependent businesses to 5x+ for scalable businesses with recurring revenue.
| Industry | Typical SDE Multiple | Key Value Drivers |
|---|---|---|
| Manufacturing (B2B) | 3-5x | Equipment, customer contracts, capacity |
| Wholesale/Distribution | 2-3.5x | Supplier relationships, territory |
| Retail (single location) | 1.5-2.5x | Location, lease terms, inventory |
| E-commerce/D2C | 2.5-4x | Brand, repeat customers, margins |
| SaaS/Software | 3-6x | ARR, churn rate, growth |
| Professional Services | 2-3x | Client relationships, recurring revenue |
| Healthcare/Diagnostic | 3-5x | Equipment, reputation, licenses |
| Restaurants/F&B | 1.5-2.5x | Location, recipes, staff |
What are the main business valuation methods?
Three primary valuation methods exist: the income approach (multiple of earnings), asset approach (net asset value), and market approach (comparable transactions). For most SMB acquisitions, the income approach is most relevant and commonly used.
| Method | When to Use | Typical Application |
|---|---|---|
| SDE Multiple | Small, owner-operated businesses | Most deals under ₹2 crore |
| EBITDA Multiple | Larger businesses with management | Deals ₹2-50 crore |
| Asset-Based | Manufacturing, real estate, distressed | Asset-heavy businesses |
| DCF | High-growth, complex projections | Larger deals, institutional buyers |
| Market Comps | When data available | Benchmarking, negotiation support |
What factors increase business value?
Factors that increase business value include recurring revenue, documented systems, diverse customer base, strong growth trajectory, transferable relationships, and owner independence.
Premium Value Factors
- • Recurring Revenue (25-50% premium)
- • Owner Independence (20-40% premium)
- • Customer Diversification (15-25% premium)
- • Documented Systems (10-20% premium)
- • Growth Trajectory (20-50% premium)
Discount Factors
- • >40% revenue from one customer (-20-40%)
- • Owner works 60+ hours/week (-15-30%)
- • Revenue declining 3+ years (-30-50%)
- • No audited financials (-10-20%)
- • Pending litigation (case-specific)
How do you verify the financials are accurate?
Verify financial accuracy by cross-referencing reported revenues with bank deposits, GST returns, and income tax filings—discrepancies are common in Indian SMBs and must be understood before determining value.
Financial Verification Checklist:
- Compare bank deposits to reported revenue (3 years)
- Review GST returns (GSTR-1, GSTR-3B) against financials
- Check income tax returns for profit consistency
- Verify major receivables exist (call customers if needed)
- Physical verification of inventory and equipment
Frequently Asked Questions
How accurate are small business valuations?
Small business valuations are estimates with typical ranges of ±20-30%, making negotiation and market reality the ultimate determinants of actual transaction price. Valuations provide a rational framework for discussion, but ultimately a business is worth what a buyer will pay and a seller will accept. Multiple methods often yield different values. Due diligence may reveal issues that change the calculation. Market conditions, buyer competition, and seller motivation all influence final price. Use valuation as a tool for informed negotiation, not an exact science. The asking price is the seller's opening position; your job is to determine fair value through analysis and negotiate accordingly.
Should I hire a professional valuator?
For acquisitions above ₹50 lakh, engaging a professional valuator (typically a CA with M&A experience) provides credibility, expertise, and can pay for itself through better negotiation outcomes. Professional valuations cost ₹25,000-75,000 for basic reports to ₹1-3 lakh for comprehensive analyses with due diligence. The valuator brings experience from multiple transactions, knows industry benchmarks, and provides a defensible third-party opinion. If you're seeking bank financing, a professional valuation is often required. For smaller deals, understanding valuation principles yourself may suffice, but even then, a few hours of CA consultation can provide valuable perspective.
What makes a business worth more than its profits suggest?
Strategic value, growth potential, and synergies can justify paying above standard multiples—but most small business buyers should be cautious about paying for unrealized potential. Strategic buyers (competitors, suppliers, companies expanding into your market) may pay premiums for customer lists, market access, or elimination of competition. Growth potential can justify higher multiples if there's a clear path to increased profits. However, as a financial buyer, be skeptical of projections. The seller had every opportunity to realize that potential and didn't. Pay for what exists, not what's promised, unless you have specific capabilities the seller lacked.
How do I value a business with declining revenue?
Value declining businesses based on their likely future trajectory, not historical peaks—often this means asset value plus minimal goodwill, or a steep discount to current earnings. First understand why revenue is declining. Is it industry-wide (structural problem) or company-specific (potentially fixable)? If you believe you can reverse the decline, value based on stabilized earnings but only pay if you can achieve that value. If the decline is structural, focus on asset value and liquidation scenarios. A business with ₹15 lakh current profit but declining 20% annually might only be worth ₹20-25 lakh (essentially buying 1.5-2 years of declining earnings) rather than ₹45-60 lakh at standard multiples.
How do cash transactions affect business valuation?
Unreported cash transactions are common in Indian SMBs and complicate valuation—be cautious about paying for income you can't verify or may not continue under your ownership. Some businesses have significant cash components that don't appear in official financials. While this income may be real, you face several issues: you can't verify it definitively, customers may not continue cash payments with a new owner, and you're being asked to pay for something based on trust rather than evidence. If cash transactions are significant (>20% of claimed revenue), either discount them heavily in your valuation, structure payment as an earnout based on realized revenue, or walk away from deals where verification is impossible.
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