Buying a small business is not like buying real estate. There's no Zestimate, no comparable sales database, and — critically — no standardized way to present financials. Every seller's P&L tells a different story, and most of those stories are... optimistic.

Valuation starts with one question: What is this business actually earning? Not what the seller claims. Not the tax return number. The real, normalized, owner-benefit earnings.

Step 1: Calculate SDE (Seller's Discretionary Earnings)

SDE is the standard earnings metric for small businesses doing under ~$5M in revenue. It represents the total financial benefit to a single owner-operator.

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

Example: A landscaping business with the following financials:

Line Item	Amount
Revenue	$780,000
COGS	$312,000
Gross Profit	$468,000
Operating Expenses	$285,000
Net Income (on tax return)	$183,000

Now add back the owner-specific items:

Add-Back	Amount	Reason
Owner salary	$95,000	Buyer replaces the owner
Owner health insurance	$18,000	Personal benefit, not business cost
Owner vehicle lease	$9,600	Personal use vehicle run through business
Depreciation	$12,000	Non-cash accounting charge
One-time legal fees	$8,000	Lawsuit settlement; non-recurring
Interest on existing debt	$6,400	Buyer brings own financing

$183,000 + $95,000 + $18,000 + $9,600 + $12,000 + $8,000 + $6,400
= $332,000 SDE

Step 2: Determine the Right Multiple

Small businesses typically sell for 2.0x–4.0x SDE. The multiple reflects risk, growth potential, and transferability.

Factor	Lower Multiple (2.0–2.5x)	Higher Multiple (3.0–4.0x)
Owner dependence	Business relies on owner relationships	Systems and employees run operations
Revenue trend	Flat or declining	Growing 5%+ annually
Customer concentration	Top client = 30%+ of revenue	No client > 10%
Industry	Declining or highly competitive	Stable or growing demand
Recurring revenue	Project-based, one-time sales	Contracts, subscriptions, repeat clients
Documentation	Incomplete records, cash transactions	Clean books, audited or reviewed

Our landscaping business: Owner-dependent (he does estimates and manages crews), moderate growth (6% YoY), some recurring contracts (40% of revenue), clean books. A fair multiple is 2.5x–3.0x SDE.

$332,000 SDE × 2.75 multiple
= $913,000 indicated value

Step 3: EBITDA Valuation (For Larger Businesses)

For businesses over ~$1M in earnings or with absentee ownership, EBITDA is the standard metric. The key difference: EBITDA does not add back the owner's salary, because the business is expected to run with hired management.

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Using the same business:

$183,000 + $6,400 + (taxes estimated $38,000) + $12,000
= $239,400 EBITDA

EBITDA multiples for small businesses range from 3x–6x, with most service businesses at 3x–4x.

$239,400 × 3.5
= $837,900 indicated value

Step 4: Asset-Based Floor Valuation

Every business has a "floor value" — what the tangible assets are worth independent of earnings. This matters most for asset-heavy businesses (manufacturing, trucking, restaurants with equipment).

Asset	Book Value	Fair Market Value
Vehicles & trailers (5)	$45,000	$78,000
Equipment (mowers, blowers, etc.)	$32,000	$22,000
Inventory (materials)	$8,000	$8,000
Accounts receivable	$42,000	$38,000
Total tangible assets	$127,000	$146,000

At $146,000 in tangible assets, the difference between asset value ($146K) and the SDE-based value ($913K) is Goodwill — the value of the customer base, brand, reputation, and systems. Goodwill is $767,000 in this case, or 84% of the purchase price.

Putting It Together: What Should You Pay?

DealForge Valuation Summary

Fair Value: $875K–$950K

SDE

$332,000

SDE Multiple

2.75x

SDE Valuation

$913,000

EBITDA

$239,400

EBITDA Multiple

3.5x

EBITDA Valuation

$837,900

Asset Floor

$146,000

Goodwill

$767,000

84% of purchase

The SDE and EBITDA valuations bracket the deal between $838K and $913K. A reasonable offer starts at the EBITDA value ($838K) and negotiates toward the SDE value only if the transition risk is low and growth is documented.

SBA Financing Considerations

Most small business acquisitions use SBA 7(a) loans. Key constraints:

10% minimum equity injection (your cash down)
Goodwill limit: SBA lenders get nervous when goodwill exceeds 50% of the purchase price. At 84% goodwill, expect pushback or a higher equity requirement.
DSCR requirement: 1.25x minimum global cash flow (business + personal income must cover all debt by 25%)
Seller note: Many deals include a 10–20% seller note on standby for 2 years, reducing the SBA loan size

Common Mistakes in Business Valuation

Using revenue multiples for small businesses. Revenue multiples (1x revenue) are used for SaaS and high-growth companies. For a $780K landscaping business, 1x revenue would value it at $780K — which ignores the 42% margin. Always use earnings multiples.
Not normalizing owner compensation. If the owner pays himself $40K but the market rate for a manager is $80K, the real SDE is $40K lower than calculated. Normalize to market-rate replacement cost.
Ignoring working capital. The business needs cash to operate — receivables, inventory, payroll buffer. If the seller is taking it all, you need to fund it separately. Budget 2–3 months of operating expenses.
Skipping the quality of earnings analysis. One-time contract? Pandemic-inflated demand? Customer about to leave? Hire an accountant to audit the last 3 years and flag non-recurring items.

How DealForge Would Analyze This

DealForge's business analysis module calculates both SDE and EBITDA from the financials you enter, then applies market multiples to generate a valuation range. The platform also:

Tracks all add-backs with justification notes
Computes ROI, break-even revenue, and debt service coverage
Models SBA 7(a) financing with realistic terms
Runs scenario analysis — what if revenue drops 10%? What if you hire a manager at $65K?
Generates a negotiation brief with key points for your offer

Explore a sample business deal in the demo, or check the FAQ for more on business deal analysis.

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Bottom Line

Valuing a small business comes down to: (1) calculate true earnings (SDE or EBITDA), (2) apply an appropriate multiple based on risk factors, and (3) verify the asset floor. Never rely on a single method — triangulate all three and negotiate from the lowest defensible number.