Calculator
Small Business Valuation Calculator (SDE Multiple)
Small businesses are commonly valued as a multiple of seller's discretionary earnings (SDE): pre-tax profit plus the owner's salary, interest, depreciation, amortization and one-time or personal expenses. Value equals SDE times a market multiple, often in the low single digits for main street businesses.
Formula
How underwriters use it
Add-backs are where small business valuations go wrong. Only add back expenses that truly end with the current owner, and document each one.
Lenders typically deduct a market salary for whoever will run the business before testing coverage, which is why the DSCR here uses SDE less a replacement manager salary.
Frequently asked questions
What multiple of SDE do small businesses sell for?
Many main street businesses trade at roughly 2x to 4x SDE, with the multiple rising for recurring revenue, transferable operations and growth, and falling for owner dependence, customer concentration or declining sales. Industry and deal size matter.
What is the difference between SDE and EBITDA?
SDE adds back one owner's full compensation, so it measures what a single owner-operator earns. EBITDA assumes the owner is replaced by a paid manager and is used for larger businesses valued by investors who will not run them personally.
Related
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