Business valuation is the process of estimating what a buyer will actually pay for your business today. For most Main Street and lower-middle-market companies, that number is Seller's Discretionary Earnings (SDE) or EBITDA multiplied by an industry multiple, then adjusted for growth, recurring revenue, customer concentration, owner dependence, and the quality of your financials. A real valuation is a range, not a single number.

How is a small business valued?

Most businesses under $5M in revenue are valued on Seller's Discretionary Earnings (SDE) times an industry multiple. Larger businesses with a management team shift to EBITDA times a multiple. The multiple itself is adjusted up or down for growth, recurring revenue, customer concentration, owner dependence, lease terms, and financial quality.

What is the difference between SDE and EBITDA?

SDE adds the owner's salary and benefits back to profit because a single owner-operator will replace themselves. EBITDA does not, because the buyer is paying a market-rate manager to run the business. Below roughly $1M in profit, SDE is standard. Above $1M to $2M with real management in place, EBITDA takes over.

What add-backs are legitimate?

One-time legal fees, personal vehicles run through the business, owner health insurance, family payroll above market rate, and non-recurring capex are usually accepted. Buyers reject add-backs for expenses the business genuinely needs to keep running.

Why is my business worth less than I expect?

The most common reasons are customer concentration, owner dependence, undocumented systems, declining revenue, cash sales that do not appear on the tax return, and a lease that does not transfer cleanly.

How accurate are online business valuation calculators?

They are a starting point, not an answer. A calculator cannot see your customer list, your lease, your team, or your competitive position. Use one to get in the ballpark, then get a broker or appraiser opinion before making decisions.

How long is a valuation good for?

Six to twelve months if the business is stable. A material change in revenue, a lost key customer, a new lease, or a shift in the buyer market can move the number quickly.

Business Valuation

Valuation is the single number that decides whether your sale is a win or a regret. Overprice and the business sits, gets stale, and eventually sells for less than it should have. Underprice and you hand a stranger the equity you spent a decade building.

There are three separate valuations for any business, and they answer different questions:

Market value. What a real buyer will pay in today's market. This is the number that matters for a sale.
Appraised value. A defensible number for legal, tax, estate, or divorce purposes. Produced by a certified appraiser using strict methodology.
Asset or book value. What the balance sheet says. Almost never the sale number.

The two cash flow metrics buyers actually use

Seller's Discretionary Earnings (SDE). Net income plus owner salary and benefits plus interest, depreciation, amortization plus one-time and personal expenses. Used for owner-operated businesses, typically under $1M in profit.
EBITDA. Earnings before interest, taxes, depreciation, and amortization. Owner comp stays as an expense because the buyer is hiring a manager. Used once a business has a real leadership team.

Industry multiple ranges (rough 2026)

HVAC, plumbing, electrical: 2.5x to 4x SDE
Landscape and janitorial: 2x to 3.5x SDE
Professional services (accounting, consulting, agencies): 2x to 3.5x SDE
Restaurants and food service: 1.5x to 2.5x SDE
E-commerce and DTC: 2.5x to 4x SDE
SaaS and recurring-revenue software: 3x to 6x ARR or higher
Distribution and wholesale: 2x to 3.5x SDE
Manufacturing: 3x to 5x EBITDA
Healthcare services: 3x to 5x EBITDA

What moves the multiple up

Recurring or contract revenue instead of one-off jobs.
No customer over 10 to 15 percent of revenue.
Owner works under 20 hours per week, or is fully replaceable.
Three years of growing revenue and profit.
Documented systems, trained staff, transferable relationships.
Clean financials that reconcile to tax returns.
Long-term, assignable lease.

What moves the multiple down

Owner is the business: sales, delivery, key relationships.
One customer over 25 percent of revenue.
Cash revenue that is not on the books.
Flat or declining revenue trend.
Deferred capex on equipment or facilities.
Short lease or personal guarantee on the space.
Financials that do not tie out.

Worked example: $1.2M service business

Revenue: $1,200,000
Net income (tax return): $110,000
+ Owner salary and benefits: $95,000
+ Depreciation and interest: $22,000
+ Legitimate add-backs (personal vehicle, one-time legal): $18,000
SDE: $245,000
Industry multiple range: 2.5x to 3.5x
Preliminary value range: $610,000 to $860,000
Adjust up for 40% recurring revenue and low owner dependence, down for 30% customer concentration. Likely list price around $780,000.

What to have ready before a real valuation conversation

Three years of tax returns and matched profit and loss statements.
Trailing twelve months P&L.
List of every add-back with a dollar amount and a reason.
Top ten customers by revenue and percent of total.
Lease, key contracts, and any franchise agreement.
Equipment list with rough age and condition.

BizBuzz Brokers provides a free, confidential valuation conversation for owners thinking about a sale in the next six to thirty-six months. No pitch, no pressure, just an honest number.

Prefer to play with numbers first? Try the Valuation Calculator →