Valuation

What Is My Business Worth?

Almost every owner asks this the same way: what is the multiple for my industry? It is the wrong first question. The multiple is the last step. What it multiplies, and how much risk sits behind it, decides the answer.

This guide explains how value is actually calculated for privately held companies, in plain terms, with the mistakes that cost owners money.

Value is earnings times a multiple

Every valuation of an operating company comes down to two numbers: an earnings figure, and a multiple applied to it. Both are argued over, and both can be improved.

The earnings figure is not your net income. Tax returns are prepared to minimize taxable income, which is the opposite of what a buyer wants to see. So the financials are recast to show what the business truly earns before the choices you made as owner.

The multiple reflects risk and growth. Lower risk and better growth mean a higher multiple. It is not a fixed industry number, it is a judgment a buyer and their lender make about how likely those earnings are to continue without you.

SDE: the measure for owner-operated businesses

SDE stands for Seller's Discretionary Earnings. It is used for smaller, owner-operated businesses where the buyer will step into the owner's role themselves.

The calculation starts with net income from the tax return, then adds back the owner's salary and payroll taxes, personal expenses run through the business, interest, depreciation and amortization, and genuinely one-time costs.

SDE answers a specific question: how much total money does this business make available to one working owner? That is why the owner's compensation is added back. The buyer is going to do that job.

EBITDA: the measure for larger businesses

EBITDA is earnings before interest, taxes, depreciation, and amortization. It does not add back the owner's compensation. Instead, a market-rate salary for whoever does that job is left as an expense.

That difference is the whole point. An EBITDA buyer is not planning to run the business themselves. They will hire a manager, so the manager's cost stays in the numbers.

The switch from SDE to EBITDA usually happens somewhere around $1 million of adjusted earnings. Above that line the buyer pool changes: private equity backed platforms, strategic acquirers, and bank financing all operate on EBITDA, and they generally pay higher multiples on a lower earnings number.

Comparing an SDE multiple to an EBITDA multiple directly is the most common valuation mistake owners make. They measure different things.

Add-backs: which ones survive

Add-backs are where valuations are won and lost, because every one of them is a claim the buyer can challenge.

Almost always accepted. Owner salary and payroll taxes in an SDE calculation, interest, depreciation, amortization, and documented one-time legal or settlement costs.
Usually accepted with support. Personal vehicles, personal travel, family members on payroll who do not work in the business, and above-market rent paid to an entity you own.
Often challenged. One-time marketing or equipment spend that recurs every few years, owner health insurance where the buyer will have the same cost, and any add-back without a receipt.
Rarely accepted. Lost revenue you believe you should have earned, expenses you plan to cut after the sale, and anything that cannot be traced to a line in the general ledger.

What moves the multiple

Two businesses with the same earnings routinely sell a full turn apart. The difference is risk.

Owner dependence. The largest single factor for small companies. A business that runs without the owner is worth materially more than one that does not.
Recurring revenue. Contracts, maintenance agreements, and repeat customers are worth more than the same dollars of one-time work.
Customer concentration. One customer above roughly 20 percent of revenue reduces the multiple, because losing them changes the business.
Earnings quality. Clean, verifiable books that tie to tax returns support a higher price. Messy books cause discounts even when the earnings are real.
Growth trend. Three years of steady growth prices better than a flat business, and much better than a declining one.
Team depth. Licensed, tenured staff who stay after closing are part of what is being purchased.
Size. Larger companies get higher multiples for the same business model, because they are less fragile and attract more buyers.

Enterprise value is not what you take home

The headline price is not the number that matters. What you keep is.

Start with enterprise value, then subtract debt paid off at closing, adjust for the working capital target, account for escrow held back, and subtract transaction fees and taxes. Then look at what is contingent: seller notes, earnouts, and rollover equity are not money in your hand at closing.

A $5 million offer with 60 percent cash at closing and a large earnout can easily be worth less than a $4.5 million all-cash deal. Evaluate offers on structure, not headline.

Why online calculators are only a starting point

Calculators, including ours, apply an average multiple to earnings you enter yourself. That is useful for orientation and nothing more.

They cannot see your customer concentration, your contract terms, your reporting quality, or how much the business depends on you. Those factors routinely swing the answer by 30 percent or more in either direction.

A real valuation reads three years of statements, tests the add-backs, examines the revenue base, and compares the result to transactions that actually closed. That is the number you can defend in a negotiation.

Frequently Asked Questions

What is the difference between SDE and EBITDA?

SDE adds the owner's compensation back into earnings, because the buyer will do that job themselves. EBITDA leaves a market-rate manager's salary as an expense, because the buyer will hire someone. SDE is used for smaller owner-operated businesses, EBITDA for larger ones.

At what point does a buyer switch from SDE to EBITDA?

Usually around $1 million of adjusted earnings, though it varies by industry and buyer type. The important effect is that the buyer pool and the financing change at the same time.

Can I use my tax return net income?

No. Tax returns are prepared to reduce taxable income and understate what the business really earns. Recasting the financials with documented add-backs is what produces the number a buyer prices.

Does revenue matter at all?

Indirectly. Revenue tells a buyer about scale and market position, but value is paid on earnings. A high-revenue, low-margin business can be worth less than a smaller, more profitable one.

How much does owner dependence really cost me?

It is the single largest discount applied to small businesses. When the buyer concludes they are purchasing a job rather than a company, both the multiple and the buyer pool shrink.

How do I get a real number for my business?

Start with the free calculator for a rough range, then request a full valuation. We review three years of financials, build the add-back schedule, and give you a specific range with the reasoning behind it.