While you may see a range of different pricing methodologies suggested, what will actually help you establish a price for your business is the SDE figure + the multiple, which typically is 2.5-3.5x for a small business (though it may be lower for higher risk acquisitions or extending up to 4x for those that are most sturdy and streamlined with management in place and passive ownership possible).
The SDE, or “Sellers’ Discretionary Earnings,” is the business’s profits plus the owner’s salary plus any additional benefits to the owner and is the one true metric at the core of small business acquisitions and sales.
The basis is simple: SDE and a multiple. The nuance is in defining that multiple, and the maintenance or improvement of that SDE figure while preparing to sell is clearly of great importance.
A business with an SDE of $500,000 of modest risk might sell for a 2.75 multiple, resulting in a $1,375,000 purchase price. The same business might improve its sellability while increasing SDE in the process, bringing the SDE to $600,000 and multiple to 3.00, resulting in a $1,800,000 purchase price — a 31% increase at exit.
BizBuySell has a helpful tool that allows you to see market data based on their listings. It may not be entirely accurate and is likely slightly inflated, but it is a free resource you can use.
We help clients identify real market data using a variety of resources, including modeling information from BVR’s DealStats and local market transactions.
Now, you will want to look at recent history as well, which may weigh into the price of the business more if revenues and SDE have been rising or declining, or if you operate a seasonal or project-based business. Likewise, industries dictate different multiple ranges and assumptions related to working capital, inventory, and equipment.
Below is a breakdown of specific levers, in no order, that will help you determine the price of your business:
1. Revenue Type (Project-Based vs. Recurring)
Why it matters:
The quality of your revenue often matters more than the total revenue. Subscription-based or recurring revenue models (e.g., long-term contracts, retainers) are more attractive to buyers because they provide predictable, stable cash flow. In contrast, project-based revenue and one-off customers can be more volatile and risky.
Tip: Incorporate new product lines that provide reliable revenues to command higher valuation multiples.
2. Revenue Trend
Why it matters:
While it’s not the only metric, total revenue gives a baseline indicator of business size and market demand. It sets the stage for further financial analysis like profit margins, trends, and scalability. Beyond that, the trend dictates the multiple quite a bit: trending up is a strong lever, while trending down scares buyers and lenders alike.
Tip: Steady revenue is good, and growing revenue is great. Look to the last 3–years in particular as recent increases build buyer confidence.
3. SDE (Seller’s Discretionary Earnings)
Why it matters:
SDE is a critical metric for small to mid-sized businesses sales. It shows the total financial benefit a single owner-operator would receive from the business, including salary, perks, and profit. Valuations are typically a multiple of SDE, so properly calculating it is vital for a sale.
Tip: Clean up your books and normalize expenses to paint a clearer, stronger SDE picture. Anticipate the concerns and questions a buyer has around adjustments to the SDE figure.
4. Management Team Quality
Why it matters:
A strong, capable leadership team lowers risk for a buyer. It means the business can operate smoothly without the owner and is more likely to thrive after a transition. While it isn’t expected for a small business to be “passive”, having structure and others responsible for key impact areas of a business is a major selling point.
Tip: Businesses with a strong team in place are more attractive to strategic and financial buyers alike. You will have many more competitive bids if you can illustrate that there are key people in place, and that they will remain with the business post-sale.
5. Reliance on Business Owner
Why it matters:
If the business is heavily reliant on the owner’s personal relationships, knowledge, or presence, it’s riskier for a buyer. That dependency can reduce the price or scare off buyers altogether. It almost always results in deal terms that keep the seller tied to the business longer, such as contingent seller notes or extended transition periods.
Tip: Systematize operations and delegate key responsibilities before listing your business. Plan for the exit so that the business can operate without you personally, even if it still needs an operating owner in place.
6. Quality of Financial Records
Why it matters:
Accurate, clean, and organized financial statements build trust with buyers and make due diligence smoother. Poor records signal potential hidden risks or mismanagement. As a buyer finds discrepancies, trust erodes and questions of what is real about the business rises. This is a recipe for derailing a deal and slowing the overall exit process.
Tip: Use a reputable accountant and prepare GAAP-compliant financials if possible. Ensure tax returns match financial statements, and any discrepancies are noted and explained upfront.
7. Competitive Advantage
Why it matters:
A sustainable competitive advantage (e.g., proprietary technology, exclusive partnerships, brand strength) boosts valuation because it makes the business harder to replicate and more defensible in the market. You’re looking for your “moat”. The larger the moat, the larger the value.
Tip: Highlight what sets you apart in your sales materials or pitch deck. Clarify why it can’t be easily replicated or exceeded by others. Continue to nurture that moat through the end of the sale.
8. Growth Opportunities
Why it matters:
Buyers pay more for businesses with untapped potential. This could include new markets, product lines, geographic expansion, or digital transformation opportunities. Buyers rarely buy a business to keep it the same, particularly considering they will have debt payments on top of the current cash flows that you don’t face in the business today. Buyers buy to grow, so show the potential.
Tip: Create a strategic growth roadmap and showcase realistic paths to scale. Have answers ready for why you haven’t implemented those strategies yet.
9. Ceiling / Potential Market Growth
Why it matters:
A business in a growing industry or emerging market is more appealing than one in decline. Market trajectory affects long-term viability and upside potential. Buyers look at headwinds and tailwinds, as well as total addressable market (TAM) to know how far the business can go in its current state.
Tip: Use third-party data to demonstrate how your industry or niche is expanding, including the trend and the potential based on current capacity and capabilities.
10. Customer Concentration
Why it matters:
If a large percentage of revenue comes from a small number of clients, it poses a risk. Losing even one could seriously hurt the business. High diversification is safer. Buyers will look at concentration in some manner of revenue from its top customer, or groups of top 3, top 5, top 10, or top 20.
Tip: Reduce dependency on any one client or group. Highlight retention metrics. Help tell the story about how secure the purchase will be and how it isn’t reliant on others outside of one’s control.
11. Business Reputation
Why it matters:
A strong brand, great reviews, and a loyal customer base enhance goodwill, an intangible but valuable asset. Reputation affects both customer trust and buyer interest. This is often what provides immediate returns for a buyer as compared to starting a new business. Years of history and building a reputation is often the cornerstone of a small business.
Tip: Showcase testimonials, ratings, and PR wins in your marketing or sale materials. Start running review campaigns to strengthen the reputation as you move towards an exit.
Estimate Your Purchase Price
Start with the baseline
As mentioned, you need to first determine your SDE: net profit + owner’s salary + owner’s personal expenses (benefits, non-business related vehicles, etc). Then, place a 3.00 multiplier on that figure. You have a very rough estimate.
Use our free Business Valuation Calculator
Refine your estimate by using our calculator, which will take into consideration a variety of factors as mentioned in this article. Using industry and financial metrics as a baseline, our proprietary formula will account for the variances in how your business is structured and operates to provide an anticipated purchase price. If you ever wish to have a personalized valuation completed, we provide those as well at a nominal fee or as part of our sell-side advisory (business brokerage) service.
About the Author
David is Bbg, Inc.’s managing director. He focuses on driving strategic growth and operational effectiveness. Passionate about helping others be at their best and fostering collaboration, he ensures excellence is seen in the clients we serve and the businesses we operate. Follow David on LinkedIn