Business Valuation Calculator

Seller's Discretionary Earnings (SDE) represents the total financial benefit a single working owner-operator derives from a business in a given year. It is calculated as net profit plus the owner's salary plus add-backs — non-recurring expenses, personal expenses run through the business, depreciation, and one-time costs. SDE is the dominant valuation method for small businesses (typically under $5M in annual revenue) because it normalizes earnings across businesses where the owner's compensation structure varies widely. A buyer needs to know how much money the business can put in their pocket if they take over full-time operations. Business brokers, the SBA 7(a) loan program, and most individual acquirers reference SDE multiples when pricing deals. Typical SDE multiples range from 1.5x for basic retail to 6x for high-growth SaaS businesses, with service businesses commonly transacting at 2x–3.5x.

SDE multiples depend on five major factors: industry, business size, growth trajectory, customer concentration, and deal structure. As a general guide, most small businesses sell for 2x–4x SDE. Higher multiples are supported by recurring revenue (subscriptions, contracts, retainers), low owner-dependence (strong management team in place), diversified customer base (no single customer representing more than 15% of revenue), documented systems and processes, consistent year-over-year growth of 10%+, and strong online reviews or brand reputation. Lower multiples result from high owner-dependency, customer concentration, declining revenue trends, weak financial documentation, and industries perceived as commoditized or at risk of disruption. Businesses under $500K in SDE typically trade at lower multiples due to a smaller buyer pool, while businesses above $1M SDE can attract private equity interest at premium multiples.

A business valuation is an estimate of fair market value based on financial metrics and comparable transactions. What a buyer actually pays is determined by supply and demand dynamics at the time of sale, the buyer's specific strategic rationale, deal structure (all-cash vs. seller financing vs. earnout), financing availability (SBA loan conditions, interest rates), representations and warranties insurance, and findings from due diligence. Strategic acquirers (competitors, companies in adjacent industries) may pay 20–40% above fair market value to capture synergies. Financial buyers (private equity, search funds) typically pay more disciplined multiples. Individual buyers may pay a premium for a business that fits their personal goals. Earnouts — where part of the purchase price is tied to future performance — can bridge valuation gaps but add risk to the seller. This is why the calculator provides a range rather than a single price point.

Use SDE multiples for businesses where a single owner-operator is actively involved in day-to-day operations, typically generating less than $1M in annual earnings. The SDE method accounts for the fact that the owner's salary is discretionary — a new owner might pay themselves differently. Use EBITDA multiples for larger businesses that have a management team in place and could operate without the founder. EBITDA is also preferred when the business has complex capital structures, multiple owners, or when institutional buyers (private equity firms) are involved. EBITDA multiples are slightly higher than SDE multiples for the same business because EBITDA implies the business has been 'de-risked' from owner-dependence. A business generating $500K in SDE might sell at 3x SDE ($1.5M), while a business generating $2M in EBITDA with a management team might sell at 5x EBITDA ($10M). The threshold where buyers switch from SDE to EBITDA framing is typically around $500K–$1M in annual earnings.

The most impactful steps to increase valuation are: (1) Reduce owner-dependence — document all processes, cross-train staff, and ensure the business can run for at least 30 days without you. Buyers pay a premium for businesses that don't collapse when the founder leaves. (2) Diversify your customer base — if any single customer represents more than 15–20% of revenue, buyers will demand a discount or an earnout. (3) Grow recurring revenue — subscriptions, maintenance contracts, and retainer agreements are valued significantly higher than project-based or one-time revenue because they reduce revenue risk. (4) Clean up your financials — buyers and their accountants will scrutinize 3 years of tax returns, P&Ls, and bank statements. Minimize personal expenses run through the business, reconcile all add-backs with documentation, and consider a Quality of Earnings (QoE) report. (5) Improve EBITDA margins — even modest cost reductions compound significantly at a 3x–5x multiple. A $50,000 improvement in annual earnings can add $150,000–$250,000 to your sale price. Ideally, begin these improvements 2–3 years before your planned exit.

A certified business appraiser (CBA) or M&A advisor will typically require: (1) Three years of tax returns (federal business returns — Form 1120, 1120S, or Schedule C) — these are the most trusted source of financial data. (2) Three years of profit and loss statements (P&Ls) — monthly and annual, prepared internally or by a CPA. (3) Most recent balance sheet showing all assets and liabilities. (4) List of all add-backs with supporting documentation — receipts, invoices, or notes explaining each item. (5) List of significant assets included in the sale (equipment, vehicles, inventory, IP) with estimated values. (6) Customer and revenue breakdown — top 10 customers by revenue, contract status, renewal history. (7) Employee list with salaries, tenure, and roles — particularly important for assessing owner-dependence. (8) Any existing contracts: customer agreements, leases, supplier agreements, IP licenses. (9) A brief description of business operations, competitive advantages, and growth history. For SBA financing, lenders also require current accounts receivable and payable aging reports. A Quality of Earnings (QoE) report — an independent financial review by a CPA — is increasingly standard for deals above $1M and can significantly accelerate buyer due diligence.