How Business Valuation Works for Small Businesses Under $5 Million
Small business valuation comes down to Seller's Discretionary Earnings and an industry multiple. Here is how buyers and lenders actually calculate the number.
Small businesses under $5M are valued using Seller's Discretionary Earnings (SDE) or EBITDA multiplied by an industry-appropriate multiple. Service businesses typically trade at 2x to 3.5x SDE; recurring-revenue businesses at 3x to 6x; restaurants at 1.5x to 2.5x. Multiples are driven by customer diversification, owner dependence, recurring revenue, and growth trend.
Step 1: Calculate SDE
Seller's Discretionary Earnings = Net income + owner salary and benefits + interest + depreciation + amortization + one-time or personal expenses. This is the total financial benefit a single owner-operator gets from the business.
Step 2: Apply the industry multiple
- HVAC, plumbing, electrical: 2.5x to 4x SDE
- Restaurants and food service: 1.5x to 2.5x SDE
- Professional services: 2x to 3.5x SDE
- E-commerce and DTC brands: 2.5x to 4x SDE
- SaaS and recurring revenue: 3x to 6x ARR or higher
- Distribution and wholesale: 2x to 3.5x SDE
Step 3: Adjust for risk and quality
Higher multiples: recurring revenue, diversified customers, owner under 20 hours a week, 3 years of growing revenue, documented systems, transferable lease.
Lower multiples: customer concentration over 25 percent, cash-heavy operations, declining trend, aging equipment, owner-dependent relationships.
Step 4: Cross-check with comparable sales
BizBuySell, broker databases, and lender comps validate your range. If your asking price is 30 percent above comparable sold listings, you will sit on the market.
Step 5: Get a second opinion before listing
A broker opinion of value focuses on what the market will pay today, which is what matters for a sale. A certified appraisal is for legal, tax, or estate purposes.
Read the full valuation guide or get a free valuation conversation with BizBuzz Brokers.