Subscribe

Small Business Valuation Guide

A jumpstart guide to valuing your small business using various methods and factors. Scroll to the end for a simple calculator to get you started.

Basic Valuation Methods

SDE Multiple Method (Seller's Discretionary Earnings)

Start with net income. Add back owner salary and benefits. Add back one-time or personal expenses. Add back taxes, depreciation, amortization, interest. Multiply by industry-specific multiple (typically 2-4x).

Asset-Based Method

List all tangible assets. Add inventory at cost. Include equipment at market value. Add accounts receivable. Subtract liabilities.

Revenue Multiple Method

Calculate annual revenue. Apply industry-specific multiple (typically 0.5-3x). Adjust based on growth rate and stability.

Key Factors That Impact Value

1

Financial Performance

Revenue trends over 3-5 years. Profit margins compared to industry standards. Working capital requirements. Cash flow stability.

2

Business Strengths

Customer concentration and loyalty. Recurring revenue percentage. Market position and competition. Systems and processes. Employee retention.

3

Risk Factors

Industry outlook. Location and market conditions. Reliance on owner. Vendor relationships. Regulatory environment.

Documentation Needed

Financial Records

  • 3 years of tax returns
  • Current year P&L and balance sheet
  • List of assets and equipment
  • Accounts receivable aging report.

Business Information

  • Customer lists and contracts
  • Employee details and agreements
  • Lease agreements
  • Licenses and permits
  • Insurance policies.

Adjustments to Consider: Owner Benefits

1

Personal Vehicle Expenses

2

Family Member Salaries

3

Travel and Entertainment

4

Personal Insurance

Adjustments to Consider: One-Time Items

1
1

Legal Settlements

2
2

Equipment Purchases

3
3

Moving Expenses

4
4

Major Repairs

Adjustments to Consider: Market Conditions

1
2
3
4
1

Local Economic Factors

2

Industry Trends

3

Interest Rates

4

Comparable Sales

Getting to the Valuation

Source: Wall Street Prep

Seller’s Discretionary Earnings (SDE) Calculation Example

Suppose you’re tasked with calculating the seller’s discretionary earnings (SDE) profit metric of a small business given the following last twelve months (LTM) financials.

  • Pre-Tax Income (EBT) = $400,000
  • Owner’s Compensation = $100,000
  • Interest Expense, net = $30,000
  • Depreciation and Amortization (D&A) = $40,000
  • Discretionary Expenses = $60,000
  • Non-Recurring Expenses = $10,000

The calculation of the company’s SDE on an ​last twelve months basis is straightforward, as we adjust pre-tax income (EBT) by adding back the owner’s compensation, interest, D&A, discretionary expenses and non-recurring expenses.

In conclusion, the sum comes out to $640k, which reflects the concept of seller’s discretionary earnings (SDE).

  • Seller’s Discretionary Earnings (SDE) = $400k + $100k + $30k + $40k + $60k + $10k = $640k

Use this ​free tool to roughly predict your company's value:

Generally, SDE or adjusted EBITDA is a more accurate gauge of businesses value. I have included revenue methods as well since I've run into owners basing valuations off a revenue multiple. What I want you to notice is the gap in SDE vs revenue — use SDE!



SDE vs. EBITDA vs. Adjusted EBITDA

Source: https://morganandwestfield.com/knowledge/should-i-use-sde-or-ebitda-to-value-a-business/