Business Valuation Calculator (SDE Method)
Understanding Business Valuation: The SDE Method
Valuing a small to mid-sized business is different from valuing a public corporation. For businesses where the owner is still active, the most accurate metric is Seller's Discretionary Earnings (SDE). This calculator helps you determine the "True Earnings" of your business and applies an industry-standard multiple to estimate its market value.
What is SDE?
Seller's Discretionary Earnings is a calculation used to determine the total financial benefit a single owner-operator derives from the business. It is calculated as: Net Profit + Owner Salary + Benefits + Depreciation + One-time Expenses. This reflects the true cash flow available to a new owner.
How Valuation Multiples Work
The "Multiple" is a factor used to multiply the SDE to reach a final price. Multiples vary based on several factors:
- Risk: Lower risk businesses (diversified clients) command higher multiples.
- Growth Potential: If the industry is expanding, the multiple rises.
- Transferability: If the business can run without the specific current owner, it is worth significantly more.
- Assets: Included inventory or heavy equipment can increase the final asking price.
Example Calculation
Imagine a local HVAC company with a net profit of $100,000. The owner takes a $70,000 salary and has $10,000 in depreciation expenses. Their total SDE is $180,000. Using an industry multiple of 2.5x, the business valuation would be:
$180,000 (SDE) × 2.5 (Multiple) = $450,000
Critical Factors for a Higher Sale Price
To increase your valuation before a sale, focus on "Clean Books." Professional financial statements often add 0.5x to a multiple because they reduce the buyer's perceived risk. Additionally, reducing customer concentration (where no single client is more than 10-15% of revenue) significantly increases business stability and value.