Business Valuation Calculator (SDE Method)
Estimate the fair market value of your small business using the Seller's Discretionary Earnings method.
Estimated Business Value
How to Value a Small Business Using the SDE Method
Valuing a small business is more of an art than a science, but the most common methodology for businesses with revenue under $5 million is the Seller's Discretionary Earnings (SDE) method. This approach calculates the total financial benefit a single owner-operator derives from the business annually.
What is SDE?
SDE stands for Seller's Discretionary Earnings. To calculate it, you start with your net profit and "add back" specific expenses that a new owner might not incur or that represent personal benefits. Common add-backs include:
- Owner's salary and payroll taxes.
- Personal health insurance premiums.
- One-time legal or professional fees.
- Non-cash expenses like depreciation and amortization.
- Personal travel or vehicle expenses run through the business.
Understanding the Multiplier
The multiplier is the factor applied to your SDE to determine the business's value. Most small businesses sell for between 1.5x and 3.5x SDE. Factors that increase your multiplier include:
- Recurring Revenue: Subscription models trade at higher multiples than one-off sales.
- Clean Books: Well-documented financials reduce buyer risk.
- Low Owner Involvement: A business that runs without the owner is worth significantly more.
- Market Growth: Operating in a trending or essential industry.
The Formula Used by This Calculator
This calculator uses the standard asset-plus-multiple formula:
Value = (SDE × Multiplier) + Saleable Inventory - Debt Assumed
Example Calculation
If a coffee shop has a net profit of $100,000, pays the owner $60,000, and has $10,000 in depreciation (add-backs), the SDE is $170,000. If the industry standard for cafes is a 2.0x multiple and they have $15,000 in coffee beans/merchandise (inventory), the valuation would be ($170,000 × 2) + $15,000 = $355,000.