Business Valuation Calculator (SDE Multiple)
How to Value a Small Business
Determining the value of a business is a critical step for both buyers and sellers. This calculator uses the Earnings Multiple Method, which is the most common approach for small to mid-sized enterprises (SMEs). This method focuses on the "Seller's Discretionary Earnings" (SDE).
What is SDE (Seller's Discretionary Earnings)?
SDE is the total financial benefit a single full-time owner-operator derives from the business. To calculate SDE, start with your net profit and "add back" expenses that a new owner might not have, such as:
- Owner's salary and bonuses
- Non-cash expenses (depreciation and amortization)
- Interest expenses
- One-time non-recurring expenses (e.g., legal fees for a specific settlement)
- Personal expenses run through the business (e.g., personal vehicle or health insurance)
Understanding the Multiple
The multiple is a factor used to multiply the SDE to reach a base valuation. Most small businesses trade between a 1.5x and 4.0x multiple. High-growth tech companies or businesses with "recurring" revenue (SaaS) often command higher multiples, while service businesses with high owner-dependency often see lower multiples.
Realistic Example:
If a local landscaping company has an SDE of $200,000 and the average industry multiple is 2.5x, the base value is $500,000. If they have $50,000 in inventory and $20,000 in debt, the final estimated value is ($500,000 + $50,000 – $20,000) = $530,000.
If a local landscaping company has an SDE of $200,000 and the average industry multiple is 2.5x, the base value is $500,000. If they have $50,000 in inventory and $20,000 in debt, the final estimated value is ($500,000 + $50,000 – $20,000) = $530,000.
Factors That Increase Your Multiple
If you want to sell your business for a higher price, focus on improving these areas:
- Reduced Owner Dependency: Can the business run without you for a month?
- Revenue Diversity: No single customer accounts for more than 10-15% of sales.
- Clean Financials: Professional, verifiable tax returns and P&L statements.
- Growth Trends: A business with increasing year-over-year profits commands a premium.
Estimated Business Value: " + formattedTotal + "
" + "| Base Earnings Value: | " + formattedBase + " |
| Inventory (Added): | + " + inventory.toLocaleString('en-US', {style: 'currency', currency: 'USD'}) + " |
| Outstanding Debt (Subtracted): | – " + debt.toLocaleString('en-US', {style: 'currency', currency: 'USD'}) + " |
| Final Valuation: | " + formattedTotal + " |