Business Appraisal Calculator

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Business Appraisal Calculator (SDE Method)

Use this calculator to get an estimated valuation of a small to medium-sized business using the Seller's Discretionary Earnings (SDE) method. This method is commonly used for businesses where the owner is actively involved in operations.

function calculateBusinessAppraisal() { var annualRevenue = parseFloat(document.getElementById('annualRevenue').value); var cogs = parseFloat(document.getElementById('cogs').value); var operatingExpenses = parseFloat(document.getElementById('operatingExpenses').value); var ownerSalary = parseFloat(document.getElementById('ownerSalary').value); var ownerBenefits = parseFloat(document.getElementById('ownerBenefits').value); var nonRecurringExpenses = parseFloat(document.getElementById('nonRecurringExpenses').value); var valuationMultiple = parseFloat(document.getElementById('valuationMultiple').value); if (isNaN(annualRevenue) || isNaN(cogs) || isNaN(operatingExpenses) || isNaN(ownerSalary) || isNaN(ownerBenefits) || isNaN(nonRecurringExpenses) || isNaN(valuationMultiple)) { document.getElementById('appraisalResult').innerHTML = 'Please enter valid numbers for all fields.'; return; } if (annualRevenue < 0 || cogs < 0 || operatingExpenses < 0 || ownerSalary < 0 || ownerBenefits < 0 || nonRecurringExpenses < 0 || valuationMultiple <= 0) { document.getElementById('appraisalResult').innerHTML = 'All monetary inputs must be non-negative, and the valuation multiple must be positive.'; return; } // Calculate Gross Profit var grossProfit = annualRevenue – cogs; // Calculate EBITDA (simplified for SDE context) var ebitdaLike = grossProfit – operatingExpenses; // Calculate Seller's Discretionary Earnings (SDE) var sde = ebitdaLike + ownerSalary + ownerBenefits + nonRecurringExpenses; // Calculate Estimated Business Value var estimatedValue = sde * valuationMultiple; document.getElementById('appraisalResult').innerHTML = '

Appraisal Results:

' + 'Calculated Seller\'s Discretionary Earnings (SDE): $' + sde.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + " + 'Estimated Business Value: $' + estimatedValue.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + " + 'This is an estimate based on the SDE method and provided inputs. Actual valuation may vary.'; } .calculator-container { font-family: 'Segoe UI', Tahoma, Geneva, Verdana, sans-serif; background-color: #f9f9f9; padding: 25px; border-radius: 10px; box-shadow: 0 4px 12px rgba(0, 0, 0, 0.1); max-width: 600px; margin: 30px auto; border: 1px solid #e0e0e0; } .calculator-container h2 { color: #333; text-align: center; margin-bottom: 25px; font-size: 1.8em; } .calculator-container p { color: #555; line-height: 1.6; margin-bottom: 15px; } .calc-input-group { margin-bottom: 18px; display: flex; flex-direction: column; } .calc-input-group label { margin-bottom: 8px; color: #444; font-weight: bold; font-size: 0.95em; } .calc-input-group input[type="number"] { padding: 12px; border: 1px solid #ccc; border-radius: 6px; font-size: 1em; width: 100%; box-sizing: border-box; transition: border-color 0.3s ease; } .calc-input-group input[type="number"]:focus { border-color: #007bff; outline: none; box-shadow: 0 0 0 3px rgba(0, 123, 255, 0.25); } .calculate-button { background-color: #007bff; color: white; padding: 14px 25px; border: none; border-radius: 6px; font-size: 1.1em; cursor: pointer; display: block; width: 100%; margin-top: 25px; transition: background-color 0.3s ease, transform 0.2s ease; } .calculate-button:hover { background-color: #0056b3; transform: translateY(-2px); } .calc-result { background-color: #e9f7ff; border: 1px solid #cce5ff; border-radius: 8px; padding: 20px; margin-top: 30px; color: #004085; font-size: 1.1em; } .calc-result h3 { color: #0056b3; margin-top: 0; margin-bottom: 15px; font-size: 1.4em; } .calc-result p { margin-bottom: 10px; } .calc-result p strong { color: #004085; } .calc-result .disclaimer { font-size: 0.9em; color: #6c757d; margin-top: 20px; border-top: 1px dashed #cce5ff; padding-top: 15px; } .calc-result .error { color: #dc3545; font-weight: bold; }

Understanding Business Appraisal: The SDE Method

Business appraisal, or business valuation, is the process of determining the economic value of a business or company. It's a critical step for various reasons, including buying or selling a business, securing financing, strategic planning, divorce settlements, and estate planning. Unlike valuing a house or a car, valuing a business can be complex due to its intangible assets, future earnings potential, and market dynamics.

Why Appraise Your Business?

  • Selling Your Business: Knowing your business's worth helps you set a realistic asking price and negotiate effectively.
  • Buying a Business: An appraisal helps buyers understand if the asking price is fair and if the investment makes financial sense.
  • Strategic Planning: Understanding your business's value can inform decisions about growth, investment, and operational improvements.
  • Financing: Lenders often require a business valuation to assess risk before approving loans.
  • Legal & Tax Purposes: Valuations are necessary for estate planning, divorce proceedings, and certain tax filings.

The Seller's Discretionary Earnings (SDE) Method

There are several methods for business valuation, each suited for different types of businesses and situations. One common method, particularly for small to medium-sized businesses where the owner is actively involved in operations, is the Seller's Discretionary Earnings (SDE) Method. This method focuses on the total financial benefit that a single owner-operator would derive from the business.

SDE is essentially the total cash flow available to one owner-operator, before any debt service, capital expenditures, or taxes. It "recasts" the financial statements to show the true profitability available to an owner, by adding back certain expenses that are discretionary or specific to the current owner.

Components of SDE:

The SDE calculation typically starts with the business's net profit and then adds back:

  1. Owner's Salary/Draw: The compensation the owner takes from the business. Since a new owner might pay themselves differently, this is added back to show the total earnings available.
  2. Owner's Benefits/Perks: Any personal expenses paid by the business for the owner's benefit (e.g., health insurance, company car, personal travel, club memberships). These are discretionary and would likely change with a new owner.
  3. Non-Recurring Expenses: One-time or unusual expenses that are not expected to continue under new ownership (e.g., a large legal settlement, a one-off consulting fee, a major equipment repair that won't be repeated soon).
  4. Interest Expense: The cost of borrowing money. This is added back because a new owner might have different financing structures.
  5. Depreciation & Amortization: Non-cash expenses that reflect the wearing out of assets or the expensing of intangible assets over time. These are added back because they don't represent actual cash outflow in the current period.

For simplicity, our calculator focuses on the most common add-backs directly impacting an owner-operator's take-home, starting from a simplified operating profit.

The Valuation Multiple:

Once SDE is calculated, it is multiplied by a "valuation multiple" to arrive at the estimated business value. This multiple is a factor that reflects various aspects of the business and its industry, including:

  • Industry: Different industries have different typical multiples.
  • Risk: Higher risk (e.g., reliance on a few customers, unstable market) leads to lower multiples.
  • Growth Potential: Businesses with strong growth prospects command higher multiples.
  • Market Conditions: The overall economic climate and demand for businesses can influence multiples.
  • Transferability: How easily the business's operations, customer base, and systems can be transferred to a new owner.
  • Size of Business: Larger, more established businesses often have higher multiples.

Multiples typically range from 1.5x to 4.0x SDE for small businesses, but can vary significantly. Consulting with a business broker or valuation expert can help determine an appropriate multiple for your specific business.

How to Use the Calculator:

Input your business's financial data into the respective fields. Be as accurate as possible. The calculator will then:

  1. Calculate your estimated Seller's Discretionary Earnings (SDE).
  2. Apply the Valuation Multiple you provide to the SDE to give you an Estimated Business Value.

Example Scenario:

Let's consider a small retail business with the following financials:

  • Annual Revenue: $500,000
  • Cost of Goods Sold (COGS): $200,000
  • Operating Expenses (excluding owner comp & non-recurring): $150,000
  • Owner's Salary/Draw: $80,000
  • Owner's Benefits/Perks: $10,000 (e.g., health insurance paid by the business)
  • Non-Recurring Expenses: $5,000 (e.g., a one-time marketing campaign expense)
  • Valuation Multiple: 2.5 (common for this type of stable retail business)

Using these figures:

  • Gross Profit = $500,000 – $200,000 = $300,000
  • Operating Profit (before owner comp/non-recurring) = $300,000 – $150,000 = $150,000
  • SDE = $150,000 (Operating Profit) + $80,000 (Owner Salary) + $10,000 (Owner Benefits) + $5,000 (Non-Recurring) = $245,000
  • Estimated Business Value = $245,000 (SDE) * 2.5 (Multiple) = $612,500

This example demonstrates how the SDE method provides a clear picture of the total financial benefit an owner receives, which is then used to estimate the business's market value.

Important Disclaimer:

This calculator provides an estimate based on the Seller's Discretionary Earnings (SDE) method and the inputs you provide. Business valuation is a complex field, and many factors can influence a business's true market value. This tool should be used for informational purposes only and not as a substitute for professional advice from a qualified business appraiser, accountant, or financial advisor.

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