A service business valuation is the purest form of the sum, because there is almost no inventory and little equipment: the value is the discretionary earnings times the multiple the owner enters, and the whole negotiation is about whether the earnings survive the owner's departure. How do you value a service business is therefore mostly a question about the add-backs, the owner's salary and hours, and about the counter, the cost of replacing them, and the multiple the owner enters carries the answer. This page works the sum on the hub's example, then the professional services firm and the consulting business, where the owner is the product. The free small business valuation tool on this site does the arithmetic from your own figures, with no account, and publishes no multiple.
Valuing a service business: discretionary earnings times the multiple you enter
Net profit for the trailing twelve months, plus the owner's salary and benefits, interest, depreciation and one-off costs, is the business's discretionary earnings; $180,000 on the hub's example. Value is that times the multiple you enter: $450,000 at 2.5, $360,000 at 2.0, $540,000 at 3.0. The hub publishes no multiple for any service, because the multiple is the buyer's judgement of whether the customers and the staff stay, and that judgement belongs to the owner entering it and the buyer arguing it. The small business valuation tool on this site shows the value at the multiple entered and at the multiples either side, and the report tool turns them into a range with a midpoint.
The owner's production, and the replacement cost that comes back out
The largest add-back in a service business is the owner's own salary, and the largest counter is what it would cost to hire someone to do what the owner does. If the owner bills half the revenue personally, a buyer who cannot do that work will subtract a market salary for a person who can, and the earnings the multiple is applied to fall accordingly. The Bureau of Labor Statistics' occupational wage data is where that market salary is read for the occupation, and the tool takes the replacement salary as an input so the earnings figure is the one the buyer will actually see. A service business valued without that line is valued for a buyer who does not exist.
How to value a professional services business: contracts, staff and the licence
A professional services firm, an accounting practice, a law office, an agency, is valued on the same discretionary earnings at the multiple you enter, with the recurring share of the revenue, the staff who hold the client relationships and the licence the firm practises under as the facts that move the multiple. Equipment is modest and added at agreed value; receivables and work in progress are usually kept by the seller or bought at a discount, and the deal says which. On the hub's example the earnings value is $450,000 at 2.5. The IRS Form 8594 is the statement allocating the price across those classes at closing.
Consulting business valuation: when the owner is the product
A consulting business is the limiting case: if the clients buy the owner, the earnings after the owner leaves are close to nothing and the multiple the owner enters has to say so; if the firm has associates who carry the engagements and contracts that renew, it is a professional services firm and valued as one. The arithmetic does not change, $180,000 of discretionary earnings at the entered multiple, but the honest multiple for a one-person practice is the buyer's estimate of what transfers, and a transition period with the owner staying on is often the deal's real price. The Small Business Administration's guide to selling a business covers the sale itself.
Questions people ask about service business valuation
How do you value a service business?
Discretionary earnings, the profit plus the owner's salary and one-off costs added back, times the multiple you enter, with the cost of replacing the owner's own production subtracted where a buyer would have to hire it. $180,000 at 2.5 is $450,000 on the hub's example.
How is a professional services business different?
The recurring share of revenue, the staff who hold the client relationships and the licence the firm practises under move the multiple you enter; receivables and work in progress are handled by the deal rather than multiplied.
Can a consulting business be valued at all?
Yes, on the same arithmetic, but the multiple has to carry what transfers when the owner leaves: for a one-person practice that may be little, and a transition period is often the real price.