How to Value a Business to Sell

The formula every buyer uses

Business value comes down to one equation:Value = Earnings × MultipleEarnings measure what the business actually makes each year. Multiple reflects how risky and how growable the buyer believes that earnings stream is. Both halves matter — the wrong earnings figure makes the multiple meaningless, and the wrong multiple can misprice a healthy business by seven figures.

SDE vs EBITDA: which one applies to you

There are two standard earnings measures. Which one a buyer uses depends on the size of the business and how the owner is involved.

Seller's Discretionary Earnings (SDE)

SDE is used for owner-operated businesses, typically under $1M–$2M in earnings. It starts with net income and adds back interest, taxes, depreciation, amortization, the owner's full salary and benefits, and legitimate one-time or personal expenses. SDE tells a hands-on buyer what total financial benefit they can expect.

EBITDA

EBITDA is used for larger businesses run by a management team. It adds back interest, taxes, depreciation, and amortization — but not the owner's salary, because a buyer will still need to pay a CEO. Private equity and strategic buyers underwriting mid-market deals ($2M+ in earnings) almost always work in EBITDA.

Typical multiples by business size

Industry matters. Software and healthcare pull higher multiples than restaurants or construction. Comparable recent transactions in your specific industry — not a national average — are the most reliable anchor.

What moves your multiple up

• Recurring or contracted revenue (subscriptions, retainers, long-term agreements)
• Diversified customer base — no single customer over 10–15% of revenue
• A management team that can run the business without you
• Clean, accrual-based financials audited or reviewed by a CPA
• Consistent year-over-year growth for the last 3 years
• Documented processes, systems, and defensible IP

What pulls your multiple down

• Owner dependency — the business needs you to function
• Customer concentration risk
• Cash-basis or inconsistent bookkeeping
• Declining or flat revenue
• Aging equipment or deferred capex
• Pending litigation or regulatory exposure
• Aggressive or undocumented add-backs

Add-backs: get them right

Add-backs are non-recurring or personal expenses a buyer will not inherit. Owner salary above market, personal auto leases, one-time legal fees, and family members on payroll are all fair game — if they are documented and defensible. The mistake we see most often is owners inflating add-backs to justify a higher price. Buyers and their accountants will find them in quality-of-earnings review, and every unsupported add-back erodes trust. Trust lost in diligence usually costs more than the add-back was worth.

A worked example

A Central Ohio HVAC service business reports $180,000 in net income. The owner takes a $95,000 salary, runs a $12,000 personal vehicle through the business, and paid $8,000 in one-time legal fees to settle a supplier dispute. Depreciation is $22,000; interest is $6,000.

SDE = $180,000 + $95,000 + $12,000 + $8,000 + $22,000 + $6,000 = $323,000. At a 3.0x multiple typical for an established HVAC service business with recurring maintenance contracts, the business is worth roughly $969,000. Push the multiple to 3.5x by demonstrating recurring revenue and a service manager who runs day-to-day, and value climbs to $1.13M. Same earnings, $160,000 difference — that is what preparation is worth.

Frequently asked questions