Your Business Isn't Worth What You Think — Here's Why

Most business owners have a number in their head for what their business is worth. Usually it came from a broker, a friend who sold, a random online calculator, or a number they decided they “need” to retire.

But buyers don't calculate value emotionally. They calculate risk. And the difference between what you think your business is worth and what a buyer is actually willing to pay can be massive.

SDE vs EBITDA — Which One Applies to Your Business?

Two valuation methods come up in almost every small to mid-size business sale. SDE and EBITDA. Most sellers have heard both terms and aren't sure which one applies to them.

SDE — Seller's Discretionary Earnings

Seller's Discretionary Earnings is used for smaller businesses, typically under $2 to $3 million in revenue. You start with net profit and add back:

• Your salary
• Personal expenses run through the business
• Depreciation
• Amortization
• One-time costs

The goal is to show a buyer the full economic benefit of owning this business. If your SDE is $400,000, that's the earnings number a multiple gets applied to.

EBITDA

EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — is used for larger businesses, generally above $2 to $3 million in revenue. The key difference: EBITDA does not add back the owner's salary. At that size, a buyer assumes they're hiring a manager to replace you.

How Multiples Actually Work

Your SDE or EBITDA gets multiplied by a number — typically between 2x and 5x for small businesses — to arrive at a valuation. On $400,000 in SDE, the difference between a 2x and a 4x multiple is $800,000.

If you want to see what this math looks like on your own number with an industry-specific multiple range, try our free business valuation calculator — no email required.

That gap is entirely determined by how buyers assess your risk.

The 7 Things That Move Your Multiple

Every one of them is something you can work on before you go to market.

1. 1

   Owner Dependency

   If the business runs through you — your relationships, your decisions, your presence — buyers price that as risk. An individual operator may see it as manageable; a strategic buyer or private equity group sees it as a multiple compressor or a deal killer. Know your buyer type before you decide how much energy to put into fixing this.

2. 2

   Financial Clarity

   Messy books, inconsistent categorization, P&Ls that don't match tax returns — when buyers can't trust your numbers they don't give you the benefit of the doubt. They lower the multiple. See our deep dive on cleaning up your financials before selling.

3. 3

   Customer Concentration

   A seller has two customers at 35% and 28% of revenue, no signed contracts. Buyer comes in at 2.5x instead of 4x. On $400,000 in SDE that's a $600,000 difference. One conversation with the right attorney two years earlier could have fixed it.

4. 4

   Revenue Quality

   Revenue you have to re-earn every month feels risky. Contracts, retainers, renewals — predictable revenue gets a higher multiple, almost without exception.

5. 5

   Documented Systems

   If your operations live in your head, a buyer is buying you — not a business. Every process that's written down reduces perceived risk and tells a buyer this place runs without you.

6. 6

   Clean Legal and Compliance History

   Pending disputes, unresolved vendor situations, regulatory gaps — buyers find all of it in due diligence and every single one becomes a negotiating point.

7. 7

   Business Trajectory

   Is revenue growing, stable, or declining? A clean upward trend over three to five years commands a higher multiple than flat or declining performance, even at identical earnings.

Your Valuation Is Not Your Check

Here's what most sellers don't calculate until they're sitting at the closing table. That $1.2 million valuation is not your check. Here's what comes out first.

Your Real Negotiating Floor

Before you talk to a single buyer or broker, run your own rough net proceeds number. Take your estimated valuation, then:

• Subtract broker fees at 10%
• Subtract your known debt
• Estimate your tax burden based on your likely deal structure

That number is your real floor — the minimum the deal needs to clear to make sense. If you want to understand exactly what you're walking into, start with what your business is worth and then map it onto the six phases of a business sale.

Frequently Asked Questions