Three ways to value a business
Revenue multiple -- price as a multiple of annual revenue (e.g., 1-3x for many service businesses). Fast to calculate but ignores profitability, so it's best used as a sanity check rather than a final number.
Earnings multiple (SDE or EBITDA) -- the most common method for small businesses. Seller's Discretionary Earnings (SDE) adds back the owner's salary and personal expenses run through the business, then multiplies by an industry-typical multiple (often 2-4x for small owner-operated businesses, higher for businesses that run without the owner).
Asset-based valuation -- sums the value of tangible and intangible assets minus liabilities. Most relevant for asset-heavy businesses (manufacturing, real estate) or ones being liquidated rather than sold as a going concern.
What moves the multiple
Buyers pay a higher multiple for businesses with recurring revenue, documented processes, a management team that isn't just the owner, diversified customers (no single client over ~15-20% of revenue), and consistent year-over-year growth. A business that depends entirely on the owner's personal relationships and expertise typically sells for a lower multiple, because the buyer is taking on more risk that revenue drops after the sale.
Frequently asked questions
What's the difference between SDE and EBITDA? SDE adds back the owner's full compensation and is standard for small, owner-operated businesses. EBITDA assumes a market-rate manager is already in place and is more common for larger businesses (roughly $1M+ in earnings) that could run without the current owner.
Is this calculator a substitute for a professional valuation? No -- it gives a ballpark range for planning purposes (thinking about retirement, a potential sale, or partner buyouts). An actual sale or legal matter (divorce, estate planning) needs a certified valuation professional.
Why do multiples vary so much by industry? Risk and growth expectations differ. A SaaS business with recurring subscription revenue commands a higher multiple than a seasonal retail shop with unpredictable year-to-year earnings.