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How can I value a service business with few physical assets?
The earnings figures and value drivers that set the price of a service company whose value lives mostly in people and customers.
By Michael D. Rubin, CEO & Founder · September 2026 · 880 words
Value an asset-light service business by its earnings, not its equipment: work out its adjusted EBITDA (or, for smaller companies, seller's discretionary earnings), then apply a multiple that reflects how dependable those earnings are. For companies with $3 million to $100 million in revenue, that multiple is most often three to seven times adjusted EBITDA. Almost all of the value in such a company is goodwill, meaning its customers, contracts, people, reputation and systems, so the question buyers ask is how much of that goodwill will stay after you leave.
Why the balance sheet understates a service company
An asset-based valuation adds up what the company owns (computers, furniture, a few vehicles, receivables) and subtracts what it owes. For a consulting firm, staffing company, IT provider or insurance agency, that number is small and says almost nothing about value. Buyers do not pay for the desks. They pay for the profits the relationships produce.
That is why the valuation starts from earnings, and why the quality of those earnings, not only their size, sets the price. It also explains why buyers spend so much of due diligence on people and contracts rather than equipment lists. They are checking whether the thing they are paying for, the stream of profit, will still be there after the handover.
Step one: use the right earnings figure
- Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization, corrected for one-time costs and for items specific to the current owner. Most buyers of companies in the $3 million-plus range use it.
- Seller's discretionary earnings (SDE) adds the owner's full pay and benefits back to profit. It is used for smaller companies where the buyer will also be the new owner-operator.
- Add-backs are expenses a new owner would not have: a personal vehicle, a family member paid but not working, one-time legal or moving costs. Each add-back needs a record behind it, or a buyer will not accept it.
- Market-rate owner pay. If you draw little salary, the buyer will subtract what a hired manager would cost. That often lowers adjusted EBITDA, and it is better to know in advance.
Step two: let quality set the multiple
Two service companies with the same earnings can be worth very different amounts. The table below shows why. An owner who wants a higher number usually gets there faster by moving items from the last column to the middle one than by adding revenue.
| Driver | Supports a higher multiple | Supports a lower multiple |
|---|---|---|
| Revenue type | Contracted or recurring, renewing each year | Project by project, won again each time |
| Customer spread | Many customers, none dominant | One or two customers carry the company |
| Owner's role | Managers hold client relationships and deliver the work | The owner sells, prices and delivers the key work |
| People | Stable team, low turnover, documented roles | Key staff who could leave and take clients |
| Margins and trend | Steady or rising margins over three years | Falling margins, or one strong year |
| Records | Monthly statements that reconcile to tax returns | Books rebuilt once a year |
An illustration of how much quality matters
Suppose two service companies each show $1.5 million of adjusted EBITDA. The first depends on its owner for sales, has one client that dominates revenue, and wins its work project by project. Priced near the low end of the three-to-seven range, it might sell for around $4.5 million to $6 million. The second has contracted revenue, a management team that runs the day, and a wide client base. Priced toward the upper end, it might sell for around $9 million to $10.5 million.
These figures are an illustration of the range, not a promise; the real number depends on the buyers in the market, the terms and the timing. But the gap between the two is the reason preparation pays, and every item in the table above is something an owner can change over one to two years.
Mistakes owners make when valuing a service company
Our long read on what your business is worth goes further into the methods and the reasons similar companies sell for different prices. The mistakes to avoid:
- Using a rule of thumb, such as a multiple of revenue, heard from a friend in a different industry.
- Assuming all goodwill transfers. If clients come for you personally, buyers discount that value unless you stay through a planned handover.
- Adding back expenses the business actually needs to operate.
- Ignoring working capital. Even an asset-light company has receivables and payables, and the working capital peg, the normal level the company must deliver at closing, can change the final figure.
- Valuing the company on next year's projection instead of the last three years of results.
How MDR & Associates values a service company
We represent business services companies, the kind of firm where value lives in people and customers, and have sold companies such as Edward M. Polk Associates, an insurance agency. The first step is a free, confidential discovery meeting and an opinion of value, a low-to-high range, after we review three years of financials. When you need a formal report for a partner buyout, an estate plan or a lender, our business valuation service provides one as a separate engagement with its own fee. For a quick first number, try the free valuation snapshot.
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