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Business Valuation Calculator (SDE Method)

Net profit + owner's salary + non-cash expenses + one-time expenses.
Small businesses typically range from 1.5 to 4.0.
The cost value of saleable inventory (often added to the valuation).

Estimated Valuation:

function calculateBusinessValuation() { var sde = parseFloat(document.getElementById('sde_earnings').value); var multiplier = parseFloat(document.getElementById('sde_multiplier').value); var debt = parseFloat(document.getElementById('business_debt').value) || 0; var inventory = parseFloat(document.getElementById('inventory_value').value) || 0; if (isNaN(sde) || isNaN(multiplier)) { alert('Please enter valid numbers for SDE and Multiplier.'); return; } var baseValue = sde * multiplier; var finalValue = baseValue + inventory – debt; if (finalValue < 0) finalValue = 0; var resultBox = document.getElementById('valuation-result-box'); var display = document.getElementById('final_valuation_display'); var breakdown = document.getElementById('valuation_breakdown'); display.innerHTML = '$' + finalValue.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); breakdown.innerHTML = 'Calculation Breakdown:' + 'Earnings Value (SDE × Multiplier): $' + baseValue.toLocaleString() + " + '+ Inventory: $' + inventory.toLocaleString() + " + '- Debt: $' + debt.toLocaleString(); resultBox.style.display = 'block'; }

How to Calculate the Value of a Small Business

Valuing a small business is more of an art than a science, but the most common method used by brokers and lenders for businesses generating less than $1 million in profit is the Seller\'s Discretionary Earnings (SDE) method.

What is SDE (Seller\'s Discretionary Earnings)?

SDE represents the total financial benefit a single full-time owner-operator derives from the business. To calculate it, start with your net profit and "add back" specific expenses:

  • Owner's Salary: The compensation paid to the primary owner.
  • Non-Cash Expenses: Depreciation and amortization.
  • Interest Expense: Costs associated with business loans.
  • One-time Expenses: Website redesigns, lawsuits, or specific equipment repairs.
  • Personal Expenses: Personal travel or meals run through the business.

The Industry Multiplier Explained

The multiplier is determined by the risk and growth potential of your industry. A higher multiplier suggests a more stable, transferable, or fast-growing business. Common ranges include:

  • 1.0x – 2.0x: Small service businesses, local retail, or businesses heavily dependent on the owner.
  • 2.0x – 3.0x: Established professional services, light manufacturing, or niche e-commerce.
  • 3.0x – 5.0x+: High-growth tech companies, recurring SaaS revenue, or companies with proprietary patents.

Example Calculation

Imagine a local HVAC company with the following metrics:

  • Net Profit: $100,000
  • Owner Salary: $50,000
  • Interest/Depreciation: $10,000
  • SDE: $160,000
  • Industry Multiplier: 2.5x
  • Inventory: $15,000
  • Business Debt: $10,000

In this scenario, the base valuation is $160,000 × 2.5 = $400,000. After adding the inventory and subtracting the debt, the final estimated value is $405,000.

Factors That Increase Your Multiplier

If you want to sell your business for a higher price, focus on these "value drivers":

  1. Owner Independence: Can the business run for a month without you?
  2. Recurring Revenue: Do customers pay via subscriptions or long-term contracts?
  3. Customer Diversification: No single customer should represent more than 10-15% of total revenue.
  4. Clean Financials: Having three years of tax returns and clear P&L statements reduces buyer risk.

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