How Much Is My Business Worth?

The first thing that confuses owners comparing notes is that the market uses two different earnings measures, and they produce different-looking numbers.

Smaller businesses trade on SDE — seller’s discretionary earnings. SDE is the business’s profit plus everything it pays its owner: salary, benefits, perks, and personal expenses run through the company. It answers the question an individual buyer is actually asking — how much money does this business put in its owner’s pocket each year? For businesses that sell in roughly the $500,000 to $2 million range, the market we call Main Street, multiples typically run 2× to 4× SDE. A business generating $300,000 in SDE will usually attract interest between $600,000 and $1.2 million — before the factors later in this article narrow where it lands in that range.

Larger businesses trade on EBITDA. Once a company is big enough to run with professional management — the owner is a manager of the business rather than the business itself — buyers switch to EBITDA: earnings before interest, taxes, depreciation, and amortization, with a real market-rate salary for management left in as a cost. For companies selling in roughly the $2 million to $25 million range — the lower middle market — multiples typically run 3.5× to 8× EBITDA and above at the top of the bracket, where recurring revenue, scale, and institutional buyers push pricing up.

Two consequences worth sitting with. First, the same business measured both ways produces two different numbers — SDE is always larger than EBITDA because it adds the owner’s compensation back — so an SDE multiple and an EBITDA multiple are never comparable. This is why your friend who sold a $10 million company quotes a multiple that has nothing to do with your business, and vice versa. Second, multiples rise with size: bigger businesses are safer purchases, attract better-funded buyers, and command more per dollar of earnings. Growing across the crossover — from owner-operated to management-run — is one of the few moves that re-prices every dollar of your earnings at once.

(These ranges are what we quote sellers as of this writing; markets move, and where your business sits inside a range matters more than the range itself.)

Most private businesses are run to minimize taxes, which means the profit on the return understates what the business actually generates. Before anything gets a multiple, earnings get recast: adjusted to show what the business produces for an owner. The classic addbacks are the owner’s salary and payroll taxes, discretionary perks — vehicles, travel, insurance — one-time expenses that won’t recur, and family members on payroll above (or below) market rates.

Recasting is legitimate and buyers expect it. It’s also where credibility is won or lost, so be honest about the two kinds of addbacks. A documented addback — your W-2 salary, an insurance policy in your name — is money in your pocket at closing, multiplied. An aggressive addback — half your grocery bill, a “one-time” expense that appears every year — dies in diligence, and it takes your other numbers’ credibility with it. Buyers who catch one padded addback re-examine everything.

A quick worked example. A business shows $120,000 in net profit on its return. The owner takes a $150,000 salary, runs $30,000 of vehicles and insurance through the company, and paid a $20,000 one-time legal bill this year. Recast SDE: $320,000. At the Main Street range of 2× to 4×, that’s a market bracket of roughly $640,000 to $1.28 million — for a business whose tax return says it makes $120,000. This is why no serious valuation starts from the bottom line as filed, and why sellers who skip the recast leave real money unclaimed. Due Diligence Preparation → covers how the file gets verified; the short version is that every addback should survive a stranger’s skeptical read, because it will have to.

The range is the market. Where you land inside it is the score, and buyers are scoring the same handful of factors in every industry:

• How revenue arrives. Recurring and contract revenue prices at the top of the range; repeat-but-uncommitted customers in the middle; one-off project or transactional sales toward the bottom. This single factor explains more multiple variation than any other.
• Customer concentration. A business where one customer is 40% of revenue isn’t a diversified income stream — it’s a relationship with a P&L attached, and buyers price the risk.
• Owner dependence. If the customers, the knowledge, and the decisions all live in your head, the buyer isn’t purchasing a business — they’re purchasing a job with a risky handoff. Businesses that demonstrably run without their owner command real premiums.
• Financial cleanliness. Reviewed statements, clean books, and a recast that survives scrutiny don’t just avoid discounts — they speed deals up, and speed protects price.
• Trend. Buyers pay for the future and use the past as evidence. Growing earnings get the benefit of the doubt; declining earnings get discounted harder than the decline itself would justify.

Industry matters too — the same score prices differently in different markets. Trades riding a consolidation wave, like Commercial HVAC →, price differently than project-based Specialty Contracting →; a Medical Practice → prices on rules of its own; asset-heavy Manufacturing → carries balance-sheet questions a B2B Services → company never faces. Our industry guides cover what buyers pay for in each market — and most of these factors are movable in the years before a sale, which is what Preparing Your Business for Sale → is about.

Somewhere, someone told you businesses like yours sell for “one times revenue” or “five times profit.” Revenue multiples are the most misleading folklore in this market: revenue tells a buyer nothing about what they’ll earn from it. Two companies with $2 million in sales — one netting $500,000, one netting $50,000 — are not worth remotely the same, and any rule that prices them identically is broken on arrival. Profit-multiple folklore fails more subtly: it’s usually a real number from a different-sized business, a different industry, or a different year, applied without its context. Rules of thumb are how sellers end up either insulted by fair offers or a year into a listing at a price no buyer will pay.

Three ways to get a number, for three different jobs:

• A broker’s opinion of value. A recast of your financials and a market-based range from someone who sees actual transactions. For deciding whether and when to sell, this is the right tool — ours is confidential and free, and Business Valuation Services → covers how we build it.
• A formal appraisal. A certified valuation from a credentialed appraiser. You need one for specific jobs — SBA-financed deals require an independent appraisal (covered on SBA Buyers →), and litigation, divorce, and partner buyouts typically demand one. You generally don’t need to pay for one just to decide to sell.
• An online calculator. Fine for curiosity; it hasn’t seen your addbacks, your concentration, or your market. Treat its output as a coin flip with decimals.