Business Valuation Calculator (SDE Method)
Estimate the market value of your small business using the Seller's Discretionary Earnings (SDE) approach.
Estimated Business Valuation
How to Value a Small Business Using the SDE Method
Valuing a small business is a critical step for owners preparing for an exit or for entrepreneurs looking to acquire a new venture. The most common method for businesses with annual revenue under $5 million is the Seller's Discretionary Earnings (SDE) method.
What is SDE?
SDE represents the total financial benefit that a single full-time owner-operator derives from the business. Since small businesses often manage expenses to minimize tax liability, SDE "adds back" certain expenses to show the true earning power of the company.
Understanding the Calculation Components
- Net Profit: The bottom-line profit reported on your tax returns or P&L statement.
- Owner's Compensation: The salary and payroll taxes for one full-time owner.
- Interest: Interest paid on business loans, as a new owner would have their own financing structure.
- Depreciation/Amortization: Non-cash expenses that don't affect actual cash flow.
- Add-backs: One-time expenses like a major website redesign, legal settlements, or personal expenses run through the business (e.g., personal cell phone or travel).
Choosing the Right Multiplier
The multiplier typically ranges from 1.5x to 4.0x. This number is influenced by your industry, geographic location, historical growth trends, and how much the business relies on the current owner. A business that runs itself without the owner's daily involvement typically commands a higher multiplier.
A local bakery has $100,000 in net profit. The owner takes a $70,000 salary. They had $5,000 in depreciation and $10,000 in interest expenses. Total SDE = $185,000. If the average bakery in that region sells for a 2.5x multiplier, the estimated value is $462,500.