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Estimated Business Value
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SDE
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Value Range (2x-4x)
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Estimate a small business's value using the industry-standard Seller's Discretionary Earnings (SDE) multiple method.
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SDE
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Value Range (2x-4x)
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Add owner salary and other add-backs to net profit to get Seller's Discretionary Earnings (SDE), then multiply by an industry-appropriate multiple, typically 2x to 4x for small owner-operated businesses.
Business Value = SDE × Multiple, where SDE = Net Profit + Owner Add-Backs
Net profit on a small business tax return often understates the real financial benefit to an owner, because it doesn't capture the owner's own salary, personal expenses run through the business, or non-cash items like depreciation. Seller's Discretionary Earnings (SDE) normalizes for this by adding those items back to net profit, producing a figure that reflects the total cash benefit available to a single owner-operator, which is what buyers of small businesses actually care about.
The SDE multiple reflects risk and growth expectations: businesses with strong recurring revenue, low customer concentration, documented systems, and low owner-dependency tend to command multiples toward the higher end (3.5x-4x+), while businesses heavily dependent on the current owner's personal relationships or expertise trade toward the lower end (2x-2.5x). Industry norms also matter; some sectors consistently trade at different multiples than others.
SDE multiple valuation is a quick benchmark, not a full appraisal. It doesn't directly account for the balance sheet (inventory, equipment, debt), which is typically negotiated separately in a deal structure, nor does it capture qualitative factors like lease terms, key employee retention, or pending litigation. For a business sale, financing decision, or dispute, a formal business valuation from a certified appraiser is worth the cost.
SDE assumes a single working owner drawing a salary from the business. Once a business is large enough to be run by professional, replaceable management (commonly above roughly $1-2M in revenue), buyers typically shift to EBITDA multiples instead, since SDE would understate the earnings power of a business that doesn't depend on one specific owner.
SDE is a small business's pre-tax net profit with the owner's salary, personal expenses run through the business, interest, depreciation, and one-time expenses added back. It represents the total financial benefit available to a single owner-operator.
Most small businesses (under roughly $1-2M in revenue) sell for 2x to 4x SDE, with the exact multiple depending on industry, growth trends, customer concentration, and how dependent the business is on the current owner.
SDE multiples work best for small, owner-operated businesses. Larger companies with professional management are typically valued using EBITDA multiples or discounted cash flow analysis instead, since SDE assumes a single working owner.
Check your business's break-even point with the Break-Even Calculator, or estimate NPV of a business investment with the NPV Calculator.
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