How to Value a Business: Key Methods (SDE, EBITDA, Multiples)

Good morning Buyers!

Finding a business is one thing. Knowing what it’s worth? That’s where the real skill kicks in.

This week, we’re diving into How to Value a Business with a clear breakdown of key methods like SDE, EBITDA, and Multiples, so you can confidently separate fair deals from overpriced distractions.

“Price is what you pay. Value is what you get.” — Warren Buffett

💡 Deal Tip of the Week: Valuation Is Part Science, Part Art

There’s no one-size-fits-all formula. But understanding the core valuation methods will help you ask sharper questions, spot red flags, and negotiate like a pro.

💰 The 3 Most Common Valuation Methods

1. SDE (Seller’s Discretionary Earnings)

SDE = Net Profit + Owner Salary + Personal Expenses + One-Time Costs

It tells you how much a new owner could reasonably expect to earn from the business—if they replaced the current owner.

Use When:

• Buying Main Street businesses (typically under $5M in revenue)

• The owner is heavily involved in day-to-day operations

Typical Multiple:
2×–3.5× SDE

2. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

EBITDA strips away non-operating factors to reflect pure operating cash flow.

Use When:

• Evaluating lower middle-market businesses

• The company has leadership in place (not owner-dependent)

Typical Multiple:
4×–6× EBITDA
Higher multiples for recurring revenue, strong margins, or high-growth niches.

3. Revenue Multiples

Use With Caution. Revenue multiples vary wildly by sector—and don’t account for profitability.

Typical Multiple:

• 0.5×–1.5× for low-margin industries

• 2×–5×+ for subscription-based, high-margin models

🧠 Questions to Ask Before Accepting a Valuation

• Is the business owner-dependent or team-run?

• Are the add-backs to SDE reasonable and documented?

• What’s the churn rate (customers or employees)?

• Is the business growing, flat, or declining?

Remember: a business that makes $500K with solid systems might be worth more than one making $700K but held together by duct tape and the owner's brute force.

🛠️ Tools & Tips to Evaluate Valuations

• BizBuySell Comps – Use listings to gauge realistic multiples in your niche

• Broker Reports – Ask for SDE/EBITDA breakdowns in the CIM

• SBA Lenders – Talk to a lender about what value they’d finance

• Valuation Calculators – Good for ballpark estimates, not final decisions

🗯Expert Soundbite 

“SDE is where most new buyers should start. It shows the cash you can actually use to pay yourself, repay debt, and reinvest.”
— David C. Barnett, Business Broker & Author

🔍 Other Factors That Impact Valuation

• Recurring Revenue = higher multiples

• Owner Involvement = lower multiples

• Industry Trends = valuation swing factor

• Customer Concentration = more risk, lower multiple

• Geography = high-density = higher price, rural = better deal terms

📉 Mini Market Watch

• Multiples Holding Steady: Most Main Street businesses are still trading at 2.5×–3× SDE, even with economic pressures

• SaaS Premium: Subscription businesses with <10% churn are commanding 3×–5× ARR in some cases

• Inflation Impact: Higher costs are hitting margins—make sure the seller’s numbers reflect current conditions, not 2022 prices

🔜 What’s Next?

Next week: “The Due Diligence Checklist Every Buyer Needs”

Forward this to a fellow buyer struggling to make sense of business valuations—or reply if you want help analyzing a specific deal.

Until next week,

— The Practical Buyer Team 

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