How To Determine What Your Business Is Worth

Decades of Experpise for Main Street & Lower Middle Market Businesses

Why SDE is Most Common:

• Simple and relatable: Small business owners often run personal expenses through the business, and SDE adjusts for this.

• Reflects true owner benefit: Buyers want to know how much income they can personally take from the business.

• Used in main street business sales: Business brokers, buyers, and lenders commonly rely on this method for businesses with under $5M in revenue.

Here’s how it works:

1. Determine SDE – Start with net profit and add back the owner’s salary, benefits, non-recurring expenses, and any personal or discretionary expenses that wouldn’t transfer to a new owner.

2. Apply a Multiple – Multiply the SDE by a market-based multiple (typically 1.5x to 4.5x for most small businesses, though this varies by industry, risk, and size). Find our your businesses value.

SDE vs. EBITDA Business Valuation: Which One Fits Your Business?

When it comes to valuing a business, the right method depends on size, structure, and buyer type. Here's how Seller’s Discretionary Earnings (SDE) and EBITDA valuation methods typically apply:

• Business Size:
  SDE is most often used for small, owner-operated businesses, also known as "Main Street" businesses. EBITDA is better suited for mid-market and larger companies with more complex operations.

• Revenue Threshold:
  Businesses with less than $5 million in annual revenue usually fall under SDE valuation. Those earning $5 million or more are typically evaluated using EBITDA.

• Buyer Type:
  SDE is designed for individual buyers who may plan to take over daily operations. EBITDA appeals to financial or strategic buyers, such as private equity firms or corporate acquirers.

• Owner Involvement:
  SDE assumes the owner is heavily involved in the business. EBITDA is used when the owner can be replaced, or the business has a management team in place.

• Valuation Multiples:
  SDE-based valuations usually range from 1.5x to 3x earnings, while EBITDA multiples tend to fall between 4x and 11x or higher, depending on industry, risk, and growth potential will be M & A transactions. Learn more about M & A transactions.