Why use SDE instead of the net profit on my tax return?

Because tax returns are optimized to minimize taxable income, not to show a buyer what the business actually generates. SDE adds back the owner's salary (a new owner might pay themselves differently, or not take a salary at all if they already have income), one-time or non-recurring expenses, and personal expenses run through the business (a vehicle, some travel, family on payroll doing minimal work). The result is closer to the business's true cash-generating power.

What's the difference between SDE and EBITDA?

Both are earnings measures used in valuation, but SDE is typically used for smaller, owner-operated businesses and adds back the owner's full compensation — the assumption is a single owner-operator will run the business themselves. EBITDA is used for larger businesses with a management team already in place, and doesn't add back a working owner's salary since that cost would continue under new ownership.

Why do multiples vary so much by industry?

Multiples reflect risk and growth expectations, not just current earnings. Recurring-revenue businesses (subscriptions, retainer clients) get higher multiples because next year's revenue is more predictable. Businesses heavily dependent on the owner's personal relationships or skills get lower multiples, because that value may not transfer to a new owner. Capital-intensive or declining industries also tend to price lower.

Is this rough estimate enough to actually price a sale?

No — treat it as a starting point for a conversation, not a number to put in a purchase agreement. A real valuation accounts for the specific business's growth trend, customer concentration, contracts, assets included in the deal, and comparable recent sales. For an actual transaction, get a certified valuation or work with an M&A advisor.

Valuation & ownership

How to Value a Small Business (SDE Multiple Method)

Most small businesses sell for a multiple of what the owner actually takes home, not revenue. Here's how seller's discretionary earnings works, why it matters more than the P&L bottom line, and what actually moves the multiple.

7 min read · Published May 2026

Key Takeaways

Most small businesses (under roughly $5M in value) sell for a multiple of seller's discretionary earnings (SDE), not revenue and not the net profit on the tax return.
SDE adds back the owner's salary, one-time expenses, and personal costs run through the business — it represents what a new owner would actually have available.
Typical SDE multiples run roughly 2x-3x for most small businesses, higher for recurring-revenue or specialized industries, lower for businesses heavily dependent on one owner.
The multiple moves on things that aren't in the P&L at all — customer concentration, owner dependence, growth trend, and how much of revenue is contractual vs. one-off.
A rough multiple gets you a starting range. An actual sale price gets negotiated against a certified valuation, deal structure, and what's actually included in the transaction.

Revenue isn’t what buyers actually pay for

A business owner asked what their company is worth often starts with revenue — “we did $2M last year.” But two businesses doing identical revenue can be worth very different amounts, because a buyer isn’t purchasing revenue. They’re purchasing the cash the business actually generates for its owner, and the reliability of that cash going forward.

For most small businesses, the standard way to estimate that is a multiple of seller’s discretionary earnings, or SDE.

What SDE actually is

SDE starts with the business’s net profit and adds back everything that represents value to the current owner but wouldn’t necessarily continue in the same form under new ownership:

The owner’s salary and payroll taxes on it
Owner health insurance and retirement contributions paid by the business
One-time or non-recurring expenses (a lawsuit settlement, a one-off equipment repair)
Personal expenses run through the business (a vehicle, some travel, family members on payroll doing little or no work)
Non-cash expenses like depreciation, and interest on debt that won’t transfer to the buyer

What’s left is a number that represents what a new owner working full-time in the business could reasonably expect to take home — before financing the purchase itself.

Applying a multiple

Once you have SDE, the estimated value is SDE × a multiple, where the multiple depends on industry, size, and risk. Small businesses generally fall in a fairly narrow band:

Industry	Typical SDE multiple
Restaurant / food service	1.5x – 2.5x
Retail / e-commerce	2.0x – 2.8x
Professional services / consulting	2.0x – 3.0x
Construction / trades	2.0x – 3.0x
Manufacturing	2.5x – 3.5x
Healthcare / medical practice	2.5x – 4.0x
SaaS / recurring-revenue tech	3.0x – 5.0x

These are broad, commonly-cited ranges — not a formula, and not specific to any one business. A business at the top of its range usually has something the multiple is rewarding: recurring contracts, low owner dependence, a documented growth trend, or a management team already in place.

Owner dependence is the multiple killer

A business that runs entirely on the owner’s personal relationships, expertise, or daily involvement is harder to sell — and sells for less — than one that would keep running the same way under someone else. If most of the value walks out the door with the current owner, buyers price that risk in.

What the multiple range doesn’t capture

A single SDE number and an industry range gets you in the right neighborhood, but real deals move on details a simple calculator can’t see:

Growth trend. A business growing 20%/year and one shrinking 10%/year with identical current-year SDE are not worth the same amount.
Customer concentration. If one client is 40% of revenue, that’s a real risk a buyer is pricing — losing that client materially changes what they bought.
What’s included. Real estate, inventory, and equipment can be included in the deal or sold separately — that changes the price directly.
Deal structure. An all-cash deal, a seller-financed note, and an earnout with performance targets are not the same $500,000 — the risk and timing of actually receiving it differ.

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Frequently asked

Questions owners actually ask

Why use SDE instead of the net profit on my tax return?: Because tax returns are optimized to minimize taxable income, not to show a buyer what the business actually generates. SDE adds back the owner's salary (a new owner might pay themselves differently, or not take a salary at all if they already have income), one-time or non-recurring expenses, and personal expenses run through the business (a vehicle, some travel, family on payroll doing minimal work). The result is closer to the business's true cash-generating power.
What's the difference between SDE and EBITDA?: Both are earnings measures used in valuation, but SDE is typically used for smaller, owner-operated businesses and adds back the owner's full compensation — the assumption is a single owner-operator will run the business themselves. EBITDA is used for larger businesses with a management team already in place, and doesn't add back a working owner's salary since that cost would continue under new ownership.
Why do multiples vary so much by industry?: Multiples reflect risk and growth expectations, not just current earnings. Recurring-revenue businesses (subscriptions, retainer clients) get higher multiples because next year's revenue is more predictable. Businesses heavily dependent on the owner's personal relationships or skills get lower multiples, because that value may not transfer to a new owner. Capital-intensive or declining industries also tend to price lower.
Is this rough estimate enough to actually price a sale?: No — treat it as a starting point for a conversation, not a number to put in a purchase agreement. A real valuation accounts for the specific business's growth trend, customer concentration, contracts, assets included in the deal, and comparable recent sales. For an actual transaction, get a certified valuation or work with an M&A advisor.

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Educational content only. This article is for informational purposes and does not constitute tax, legal, or financial advice. Every situation is different — consult a qualified professional before acting on anything here.