form just input all of the numbers that are relevant to your business in the appropriate
ﬁelds and it will automatically calculate your estimated business value. If you need
to better understand what to input into one of the ﬁelds you may skip down to the
instructions below the form, which will show you how to value a business in three
steps.
Owner’s Salary
Owner’s Travel or Perks
Family Member’s Salary in Non-Essential Roles
(or Salary Above Average of Position)
Leisure Activities (Company Outings, Parties, or Retreats)
Charitable Donations
Personal Purchases on Business Tax Return (Like an Owner’s Personal Vehicles)
One-Time Expenses (Like Expenses to Sell the Business)
Seller’s Discretionary Earnings (SDE)
Multiplier
Value Before Assets/Liabilities
Owned Real Estate Value
Estimated Value of Furniture, Fixtures & Equipment
Current Cash on Hand
Current Accounts Receivable
Current or Average Inventory
Any Other Assets
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How to Value a Business in 3 Steps
Step 1: Calculate Seller’s Discretionary Earnings (SDE)
Step 2: Find Out the SDE Multiplier
Most experts agree that the starting point for valuing a small business is to normalize
or recast the business’ earnings to get a number called Seller’s Discretionary Earnings
(SDE)
. SDE gives you a good idea of a business’ true revenue potential, that you can
then use to estimate the value of the business.
Small businesses report expenses on their tax returns with an eye towards reducing
their tax burden. For this reason, using revenue numbers from a business’ tax return can
underestimate how much revenue the business actually produces.
SDE gives you a better idea of the business’ true revenue potential by adding back in
expenses listed on the tax return that are not necessary to run the business. It also adds
back in the owner’s salary and one-time expenses that are not expected to recur in the
future. This increases the net income of the business and gives you a good idea of its
true proﬁt potential.
According to Wayne Quilitz, President of business brokerage ﬁrm Murphy Business and
Financial Corporation, here are some examples of things that would be added back into
Generally, businesses sell for somewhere between 1 and 3 times SDE. This is called
the SDE multiple or multiplier. Finding the right SDE multiple is really more of an art
than a science because it varies based on industry and geographic trends (market risk),
company size, the business’ tangible and intangible assets, independence from the
owner (owner risk), and many other variables.
Owner’s salary and perks
Family members on payroll
Non-cash expenses such as depreciation and amortization
Leisure activities, such as business golf outings
Charitable donations
Any personal expenses, such as the purchase of a personal vehicle, that were noted as
expenses on the business tax return
One-time expenses that are unlikely to recur after the sale of the business, such as the
settlement of a lawsuit
In general, one-time expenses and anything that’s not essential to running the business
The biggest factor inﬂuencing the SDE multiple is usually owner risk. If the business
is highly dependent on the owner, it cannot be easily transferred to new ownership,
and the business’ valuation will suer. Market risk is also important. If you’re buying or
selling a business in an industry and/or area that is expected to grow in the near future,
the SDE multiple will be higher.
You can ﬁnd out the approximate SDE multiple to use by looking at BizBuySell’s media
insights quarterly report. BizBuySell provides multiples for dierent industries based
on reported business sales data (after clicking the link above, scroll to the very end of
the page and look at the far right column in the last table to see the SDE multiple for
each industry. Its called cash ﬂow on BizBuySell but is the same thing as SDE). For a
more personalized estimate of the multiple, you can also consult a business broker or
appraiser.
The ﬁnal step of how to value a business is to account for business assets and liabilities
that aren’t already included in the SDE multiple. Most small business sales take the legal
structure of an “asset sale.” The purchaser is buying a bunch of assets or things that
make up the business. Typically, the seller retains liabilities. What is purchased will vary
from sale to sale.
typically included in the SDE multiple. Similarly, inventory and ﬁxtures, furnishings, and
equipment (FFE) are usually accounted for in the SDE multiple. However, according to
Wayne Quilitz, “SDE multiples from dierent databases may include dierent assets in
valuing a business.” For example, a popular database called BizComps does not include
inventory in its SDE multiples, so inventory must be added into the valuation separately.
Other assets like real estate (if the business owns any property), accounts/receivables,
and cash on hand are generally not included in the SDE multiple. These assets should
be added into the valuation separately (as shown below) if you are purchasing them.
The ﬁnal step to calculating the value of a business is to subtract any liabilities that are
included in the sale, such as debt and interest payments (as shown below).