You value a small business with one formula: figure out its real owner earnings (SDE), then multiply by a number that's almost always between 2 and 3. That's it. Most main-street businesses sell for around 2.5 to 2.8 times SDE. The whole job is getting SDE right and being honest about which way the multiple should move.
That's the answer. The rest of this is how to actually do it — calculate SDE off the P&L, pick the multiple, and adjust it for the things that make a business safe or scary to take over. If you're buying an owner-operator business, this is the math you'll run on every deal before you ever talk price.
What SDE is — and why it's the number, not profit
SDE stands for Seller's Discretionary Earnings. In plain terms: it's all the money the business actually puts in one owner's pocket in a year. Not the "net income" line at the bottom of the tax return — that number is built to be small so the seller pays less tax. SDE is built to show the real benefit of owning the thing.
Here's why net income lies. A small business owner runs a bunch of personal-ish stuff through the company, pays themselves a salary, and writes off equipment over years. None of that is a real operating cost to the next owner. So you take net profit and you add it all back.
The recipe is simple. Start with net profit, then add back:
- The owner's salary / wages they pay themselves — one owner's full comp comes back, because the new owner replaces that role.
- Interest, taxes, depreciation, and amortization (the ITDA part — same idea as EBITDA, but for a one-owner business).
- One-time and non-business expenses — the owner's car lease, their phone, the "consulting fee" that's really their spouse, the legal bill from that lawsuit that's never happening again.
That total is SDE. It's the honest version of "what does this business earn." A formal name for the list of stuff you add back is add-backs, and a big part of valuing a deal is deciding which add-backs are real and which ones the seller is sneaking in to pump the number. A country-club membership the business genuinely doesn't need? Fair add-back. A "one-time" expense that shows up three years in a row? That's not one-time, and it shouldn't come back.
This is also exactly why I always tell people the seller's package won't hand you the number. The packet a broker sends — the CIM — will quote you an SDE that's been massaged in the seller's favor. Your job is to rebuild it from the real P&L. (If you want the deep version on reading that packet, see how to read a CIM.)
The multiple — what small businesses actually sell for
Once you've got SDE, value is just SDE times a multiple. The whole game is: what's the multiple.
Here's the part nobody selling you a course will tell you straight, so I'll just give you the real number. Across all the small businesses that actually closed in 2024, the median sale price was about $345,000, at an average of roughly 2.57 times cash flow — and that multiple has been drifting up toward 2.7x — per BizBuySell's 2024 data. "Cash flow" in that report means SDE — the exact number we just built.
So if you anchor at "2.5 to 2.8x SDE" for a normal main-street business, you're standing on the same ground the actual market closes on. That's your default. Everything else is an adjustment off that.
Two things move the multiple before you even look at the specific business — size and industry:
- Size. The same dollar of profit is worth more in a bigger business. Businesses with SDE under $100K often trade in the 1.2 to 2.4x range, while ones doing $500K+ in SDE stretch to 2.5 to 3.5x and up. Bigger = less owner-dependent = safer = higher multiple.
- Industry. Multiples run from about 1.5x on the low end to 4x and higher for select categories — you can browse real asking prices and multiples by industry. A staffing agency that lives and dies on one person's relationships sits low. Recurring-revenue software or a well-run home-services brand with contracts sits high.
What pushes the multiple up vs. down
Now the part that actually separates a 2.2x business from a 3.2x business of the exact same size. Same SDE, wildly different value, and it all comes down to risk. A multiple is just the market pricing how confident it is that the earnings keep showing up after the current owner walks out the door.
Things that push the multiple up:
- Recurring revenue. Contracts, subscriptions, retainers, service agreements. Money that shows up next month whether or not you sell anything new is the single most valuable thing a small business can have.
- Real growth. Revenue and SDE trending up over the last 3 years. You're buying the future, and an up-and-to-the-right trend gets paid for.
- It runs without the owner. A manager, documented systems, a team that doesn't need the owner in the building. The less the business is the owner, the more it's worth.
- A spread-out customer base. No single customer makes or breaks the year.
Things that push it down — and these are the ones that quietly wreck deals:
- Owner-dependence. If the business is one person — their relationships, their license, their name on the door — you're not buying a business, you're buying a job that disappears the day they leave. This is the #1 multiple-killer in small deals.
- Customer concentration. One client is 40% of revenue? That client can fire you in an email and erase your entire return. Buyers pay way less for that, and they're right to.
- Declining revenue. A business shrinking for 3 years isn't a 2.5x business at a discount. It's a falling knife, and the multiple should reflect that you're catching it.
- Messy or unverifiable books. If you can't trust the numbers, you can't trust the SDE, and the whole valuation is a guess. Sloppy books are a discount every time.
A worked example — let's actually run one
Numbers make this real, so let's value a fake business. Call it a small HVAC company. Here's what the tax return shows for last year:
- Net profit (bottom line): $95,000
- Owner pays themselves a salary of $70,000
- Depreciation on trucks and equipment: $22,000
- Interest on a loan: $8,000
- Owner's personal truck + phone run through the business: $11,000
- A one-time legal bill that won't repeat: $9,000
Add it up. SDE = 95,000 + 70,000 + 22,000 + 8,000 + 11,000 + 9,000 = $215,000. That's the real earnings — over double the "profit" the tax return showed.
Now the multiple. It's a solid main-street trade, so start at the market default — call it 2.6x. Then adjust for what we actually see:
- 40% of revenue is recurring maintenance contracts → push it up.
- But the owner personally holds the key customer relationships and does half the sales → push it down.
Those two roughly cancel, so we land near the market multiple — say 2.6x. Value = 215,000 × 2.6 = ~$559,000. If you could prove the owner-dependence is fixable (there's a lead tech who can run it), you might argue 2.9x and ~$624,000. If the books were a mess and one customer was 50% of revenue, you'd be down at 2.0x and ~$430,000 — same business, same SDE, $190K swing. The multiple is where the whole negotiation lives.
Why the asking price isn't the value (and never was)
Here's the thing most first-time buyers get backwards. The asking price is not the value of the business. It's a number the seller picked, often with a broker who gets paid more when it's higher. It's the start of a conversation, not a fact.
Sellers price on emotion and on what they "need" to retire, not on a clean SDE-times-multiple read. So you'll constantly see businesses listed at 4x, 5x, even higher SDE — and then they sit, unsold, for a year, because the market closes around 2.5 to 2.8x. The gap between the asking price and the real number is the gap you negotiate into, or walk away from.
And the seller's packet won't hand you the value either. The CIM is a sales document. It'll show the friendliest SDE, the friendliest growth story, and an asking price built on top of both. Your whole job is to ignore the headline number and rebuild it yourself from the actual P&L and tax returns. The value isn't in the packet. It's in the work.
That's the real reason valuation matters more than people think. It's not so you can sound smart. It's so that when a seller says "$900K, firm," you can look at $215K of real SDE and know — calmly, with the math in front of you — that the number is 2.5 to 2.8x of that, and everything above it is theirs to justify or yours to walk from. The math is your spine in the negotiation.
Run SDE-times-multiple on every deal you look at. Half the listings die right there, before you waste a minute on diligence. That's the point. The valuation isn't the finish line — it's the filter that tells you which deals are even worth the rest of your time.
DealStratum helps you find and source a business to buy — on-market and off. It's not a broker, a lender, or a financial advisor. Nothing here is investment or financial advice. Always confirm SDE, add-backs, and any valuation with your own accountant and advisors before you make an offer.
Sources
DealStratum · AI Deal Screening
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