Business Valuation Calculator
Estimate the market value of your business based on SDE (Seller's Discretionary Earnings) and industry multiples.
Estimated Enterprise Value
How to Value a Business: The SDE Multiple Method
Valuing a small to mid-sized business involves more than just looking at the bank balance. The most common method for businesses generating under $1 million in profit is the Seller's Discretionary Earnings (SDE) method. This calculation helps buyers understand the total financial benefit a single owner-operator would derive from the business.
What is SDE?
SDE is calculated by taking your net profit and "adding back" expenses that are specific to the current owner but wouldn't necessarily be required by a new owner. Common add-backs include:
- Owner's salary and bonuses
- Personal health insurance paid by the business
- One-time legal or professional fees
- Non-cash expenses like depreciation and amortization
Understanding Industry Multiples
The "multiple" is a factor used to determine the value based on the risk and growth potential of the industry. For example:
- Service Businesses: Often trade at 1.5x to 2.5x SDE.
- SaaS/Tech: Can trade at 4x to 10x SDE (or Revenue).
- Retail/Restaurants: Typically trade at 2x to 3x SDE.
Real-World Example
Imagine a local landscaping company with an annual SDE of $200,000. If the industry standard multiple for landscaping in that region is 2.2x, the baseline value is $440,000. If the company also has $50,000 in inventory and $30,000 in equipment, but carries $20,000 in debt, the final valuation would be:
($200,000 × 2.2) + $50,000 + $30,000 – $20,000 = $500,000
Factors That Increase Your Business Value
To secure a higher multiple during a sale, focus on these key drivers:
- Recurring Revenue: Subscription-based income is valued much higher than one-off sales.
- Clean Financials: Verifiable tax returns and P&L statements reduce buyer risk.
- Owner Independence: A business that runs without the owner's daily involvement is worth significantly more.
- Customer Diversity: No single customer should represent more than 10-15% of total revenue.