Business Valuation Calculator

Small businesses—those with under $5 million in annual revenue—are typically valued using the Seller's Discretionary Earnings (SDE) method. Unlike large-company valuation, which uses EBITDA multiples, SDE captures the total economic benefit an owner-operator receives from the business: not just net profit, but also the owner's salary, benefits, personal expenses run through the company, non-cash charges, and one-time costs. The logic is simple—a buyer is purchasing the right to step into the owner's shoes and receive everything the current owner receives.

The SDE build-up

SDE = Net Profit + Owner Salary + Owner Benefits + Depreciation + Interest + Amortization + One-Time Expenses

Each add-back represents a dollar that left the business but didn't truly belong to operations. The owner's salary disappears for a buyer who will work in the business themselves (their compensation becomes the profit). Depreciation and amortization are non-cash accounting entries. Interest reflects the seller's specific financing structure, not the business's earning power. One-time expenses—lawsuit settlements, disaster repairs, the cost of a failed product launch—won't recur for a buyer. Adding these back yields a normalized cash flow figure that reflects what a new owner-operator would actually pocket.

Applying the multiple

Valuation = SDE × Multiple

For owner-operated small businesses, multiples typically range from 2x to 4x SDE. Lower multiples (1.5–2.5x) apply to businesses that are owner-dependent, single-location, in declining industries, or have customer concentration risk. Higher multiples (3.5–5x+) reward businesses with documented systems, recurring revenue, diversified customer bases, growing markets, and the ability to run without the owner present. A stable local service business might sell for 2–3x SDE; a fast-growing SaaS company could command 5–10x revenue (a different metric entirely).

What drives a higher multiple

Five factors push your multiple toward the top of the range. Recurring revenue—subscriptions, contracts, retainer agreements—reduces buyer risk and can add a full turn to your multiple. Growth trajectory matters: a business growing 20% per year commands more than one flat or declining. Customer diversification—no single customer above 10% of revenue—lowers risk. Documentation: clean financials, written SOPs, and a management team that doesn't need the owner. Industry tailwinds: a business in a hot sector (cloud software, healthcare IT, e-commerce enablers) gets a premium; one in a declining sector (print publishing, video rental) gets discounted.

SDE vs EBITDA

Once a business reaches roughly $5M revenue and is run by professional management (not the owner), valuations shift to EBITDA multiples, typically 3–7x. The difference: EBITDA does not add back owner salary, because the owner isn't working in the business—so a buyer must pay a CEO out of EBITDA. EBITDA multiples are higher than SDE multiples, but the base number is lower; the valuations end up comparable for businesses at the transition point. Use SDE if you're an owner-operator; use EBITDA if you've hired a management team and stepped back.

Increasing value before a sale

If you're 1–3 years from selling, focus on the levers that move both SDE and the multiple. Grow SDE by cutting personal expenses run through the business (a buyer will discount those), stabilizing earnings, and cleaning up your P&L. Grow the multiple by securing multi-year customer contracts, documenting processes so the business runs without you, diversifying your customer base, and showing consistent year-over-year growth. A business that doesn't depend on the owner can sell for 30–50% more than one that does—what buyers call the "key person discount" works in reverse.