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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