How to Value a Small Business (Without the Vanity Math)
A cold method for valuing a small business: SDE, multiples, the adjustments brokers won't show you. UK and US founders.
How to value a small business is one of those questions where the wrong answer is comforting and the right answer is awkward. Most owners overvalue. Most brokers undervalue. Both groups are right about the other.
The two numbers that actually matter: SDE and EBITDA
Seller's Discretionary Earnings (SDE) is what the business produces for one full-time working owner: net profit + owner salary + owner perks + interest + tax + depreciation + one-off items. It's the right number for businesses under roughly $1M in profit.
EBITDA is what's left after you pay a market-rate manager to do the owner's job. It's the right number once the business is big enough that the buyer won't be the operator. Mixing the two is the most common valuation error.
Multiples are a range, not a number
Service businesses trade at 2–4× SDE. Productised services and agencies, 3–5×. E-commerce, 2.5–4× SDE depending on channel risk. SaaS, 3–8× ARR or 5–15× EBITDA depending on growth, churn, and concentration. Anyone quoting one number is selling something.
The adjustments brokers quietly make
- Customer concentration discount. If your top customer is >25% of revenue, multiples compress 20–40%. See customer concentration risk.
- Owner dependency discount. If the business stops without you, expect 30–50% off.
- Quality of earnings. Cash-basis books, no separation between personal and business expenses, missing contracts: all discounts.
- Trend. Three years of growth: premium. Flat: at multiple. Declining: discount or no sale.
Self-valuation in fifteen minutes
Take last year's net profit. Add back your salary, your spouse's salary if they don't work, your car, your phone, your one-off legal fees. That's SDE. Multiply by 2.5 for a floor and 4 for an optimistic ceiling. The truth is usually closer to the floor.
FAQ
How do you value a small business to sell? SDE × a market multiple, adjusted down for owner dependency, customer concentration, and earnings quality.
What's the rule of thumb to value a small business UK? Same logic — 2–4× SDE for service businesses, 3–5× for productised offerings. UK buyers are typically stricter on add-backs.
How is a small business valued based on revenue? Revenue multiples are unreliable for small businesses; profit multiples win. The exception is fast-growing SaaS, where ARR multiples apply.
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