How Small Businesses Are Actually Valued

If you're a business owner thinking about selling — or just curious what your company might be worth — you've probably searched for answers and found a lot of confusing jargon. DCF analysis, EBITDA multiples, comparable transactions. It sounds complicated.

Here's the truth: for most small businesses, the math is surprisingly simple.

The Basic Formula

Most small businesses (under $5M in revenue) are valued using a straightforward equation:

SDE stands for Seller's Discretionary Earnings — essentially the total financial benefit you get from owning the business. We'll explain this in detail below.

Multiple is a number (usually between 1.5 and 4.5) based on your industry, size, and risk factors.

What Is SDE?

Seller's Discretionary Earnings is your business's true earning power. It starts with net profit, then adds back:

• Your salary — what you pay yourself
• Personal expenses — things you run through the business (car, phone, meals)
• One-time costs — that lawsuit settlement or equipment purchase that won't repeat
• Non-cash expenses — depreciation and amortization

The idea is simple: SDE represents what a new owner could take home if they ran your business. Buyers figure they'll capture this same benefit.

What Determines the Multiple?

The multiple varies based on several factors:

• Industry — Tech companies get higher multiples than restaurants
• Size — Larger businesses (more SDE) command higher multiples
• Growth — Growing businesses are worth more than flat or declining ones
• Risk — Customer concentration, owner dependency, and lease terms all affect risk
• Recurring revenue — Subscriptions and contracts are worth more than one-time sales

Here are typical ranges by industry:

• Restaurants & Food Service: 1.5 – 2.5x
• Retail: 1.5 – 2.5x
• Service Businesses: 2.5 – 3.5x
• Healthcare Practices: 3.0 – 4.0x
• Tech & Software: 3.5 – 5.0x+

A Quick Example

Let's say you own a landscaping company:

• Net profit: $150,000
• Your salary: $80,000
• Personal vehicle expense: $12,000
• SDE = $150,000 + $80,000 + $12,000 = $242,000

Landscaping businesses typically sell for 2.0 – 2.5x SDE. Using 2.25x:

Why This Matters

Understanding the formula gives you two things:

1. A realistic expectation — You won't be surprised when a broker or buyer runs the numbers
2. A roadmap to increase value — You can focus on increasing SDE or improving factors that boost your multiple

Most owners overestimate their business value because they think about how hard they've worked or how much revenue they generate. Buyers think differently — they care about what they'll actually take home.