Business Valuation Calculator

SDE (Seller's Discretionary Earnings) and EBITDA are both normalized earnings metrics, but they serve different buyer types. SDE adds the owner's entire compensation package (salary, payroll taxes, benefits, and personal expenses) back to pre-tax net income. It represents the total economic benefit to a single owner-operator and is the standard for businesses with under $2M–$5M in revenue. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) assumes the owner is replaced by a salaried CEO, so the owner's compensation is NOT added back — instead, a market-rate management salary is deducted. EBITDA is used for mid-market and corporate acquisitions. For the same business, SDE will always be higher than EBITDA because it includes the owner's full compensation. A business with $80K net income, $100K owner salary, and $20K personal add-backs would show: SDE = $200K. EBITDA = $80K + $25K D&A + $0 interest = $105K (assuming $75K market CEO salary already deducted). This is why the applicable multiple differs: SDE transactions use 2–4x; EBITDA transactions use 4–8x or higher.

The right valuation multiple depends on five key factors: (1) Industry and business model — SaaS businesses with recurring revenue trade at 5–8x EBITDA while restaurants trade at 1.5–2.5x SDE. (2) Revenue size — larger businesses (>$2M SDE) attract institutional buyers willing to pay premium multiples due to reduced owner-dependency risk. (3) Revenue quality — recurring subscription revenue is valued far higher than one-time project revenue. (4) Customer concentration — if your top 3 clients represent more than 30% of revenue, buyers will discount the multiple due to key account risk. (5) Owner dependency — a business that requires the owner's direct involvement in sales or operations will be discounted. Current (2025) median sale multiples by type: SaaS/Software: 5–8x EBITDA. E-Commerce: 2.5–4x SDE. Manufacturing: 3–5x EBITDA. Local service businesses: 2–3.5x SDE. Restaurants/retail: 1.5–2.5x SDE. Professional services (law, accounting): 1–2x SDE.

Add-backs are legitimate business expenses that inflate reported costs and suppress net income, but would NOT be incurred by a new owner. Properly documenting add-backs directly increases your Seller's Discretionary Earnings (SDE), which is then multiplied by the valuation multiple — creating a lever effect. Example: Every $10,000 in valid add-backs you identify adds $25,000–$40,000 to your sale price at a 2.5–4x multiple. Common valid add-backs: (1) Owner's salary and payroll taxes — the full W-2 or K-1 compensation. (2) Personal expenses — owner's vehicle payments, cell phone, health/life insurance premiums, travel. (3) One-time non-recurring expenses — legal settlements, one-time equipment repair, pandemic-era costs. (4) Depreciation and amortization — non-cash GAAP charges on equipment and intangibles. (5) Interest expense — financing costs that a cash buyer would eliminate. (6) Above-market rent — if the business pays rent to the owner's holding company above market rate, recast to market. Invalid add-backs (that buyers will reject): personal expenses that cannot be clearly documented, normalized recurring costs essential to operations, and aggressive reclassifications that stretch credibility with sophisticated buyers and their lenders.

The asset-based valuation method calculates a company's value as its Net Asset Value (NAV) = Total Assets − Total Liabilities. This represents the liquidation or book value of the business — the minimum a seller should accept, as it is what the business would be worth if all assets were sold and all debts paid off. For profitable going concerns, the market (income) valuation is almost always higher than NAV, because goodwill — the intangible value of brand reputation, customer relationships, proprietary processes, and trained staff — is NOT reflected on the balance sheet. The difference between the Market Valuation and NAV is called Goodwill or "Blue Sky." Example: A plumbing company with $150K in equipment and inventory (assets) and $50K in debt has a NAV floor of $100K. With $120K SDE and a 2.5x multiple, the market value is $300K. The $200K premium above NAV ($300K − $100K) is pure goodwill — you are paying for the brand, customer list, and trained technicians. Asset-based valuation becomes the dominant method when a business is unprofitable or being liquidated, as there is no positive earnings to capitalize.

Yes, strategic buyers typically pay 20–40% more than financial buyers for the same business. A financial buyer (private equity, individual investor) values the business purely based on its standalone cash flow and the return on their investment. A strategic buyer (competitor, supplier, customer, or industry roll-up) pays for synergies — value created by combining the acquired business with their existing operations. Synergies include: eliminating redundant overhead (one CEO, one accounting team), cross-selling the acquired customer base, gaining proprietary technology, entering a new geography, and eliminating a competitor. Example: A pest control company with $500K SDE might trade at 3x ($1.5M) with a financial buyer. A national pest control roll-up acquiring it for geographic expansion might pay 4.5x ($2.25M) because they can immediately apply $200K/year in synergies by eliminating the owner's salary and merging back-office operations. For sellers, the lesson is to run a competitive sale process with multiple potential buyers, specifically including strategic buyers who can pay a synergy premium. A good M&A broker will run a structured process to surface strategic buyers.

Working Capital is the liquid fuel a business needs to operate day-to-day. It is defined as: Current Assets (cash, accounts receivable, inventory) minus Current Liabilities (accounts payable, short-term debt, accrued expenses). When a business is sold, buyers expect a "normalized" level of Working Capital to remain in the business so operations can continue without injecting additional cash. The Working Capital peg is a negotiated target amount agreed to at the Letter of Intent (LOI) stage, based on the trailing 12-month average. Post-close mechanics: If the final Working Capital at closing exceeds the peg, the seller receives a dollar-for-dollar purchase price increase. If it falls below the peg, the seller pays a dollar-for-dollar reduction. This is called a "true-up." Common seller mistake: Aggressively collecting receivables and delaying payments in the 60–90 days before closing to extract cash from the business. This dramatically reduces Working Capital at closing and results in a post-close price adjustment that nets the same outcome — plus it signals bad faith to the buyer. Best practice: Manage Working Capital normally and negotiate the peg based on accurate trailing averages.

The average time to sell a business from listing to close is 6 to 12 months, though it varies significantly by deal size and complexity. A typical timeline: Months 1–2: Prepare the business for sale — compile 3 years of financial statements, build a Confidential Information Memorandum (CIM), and identify potential buyers. Months 2–4: Go to market. A good M&A broker will contact 50–200+ potential buyers (both strategic and financial) through a structured process, generating initial interest and NDAs. Months 3–5: Letters of Intent (LOIs) are submitted. The seller selects the best offer (not always the highest price — structure matters). Month 5–9: Due diligence. The buyer's team examines every aspect of the business: financials, legal contracts, customer concentration, IP, and operations. This is where deals most commonly fall apart. Months 8–12: Purchase Agreement negotiation and legal closing. Larger businesses ($10M+): Add 6–12 months for regulatory approvals, financing complexity, and institutional due diligence. The single biggest factor that extends timelines: poor financial record-keeping. Sellers with CPA-prepared, accrual-basis financials for 3+ years close 2–3x faster than those with cash-basis or internally-prepared books.

The structure of the deal — asset sale vs. stock/equity sale — has major tax and liability implications for both parties. In an asset sale (the most common structure for small businesses): The buyer purchases specific assets of the company (equipment, goodwill, customer list, inventory) but not its legal entity. The seller remains responsible for all pre-closing liabilities. The seller typically pays capital gains tax on goodwill (usually 15–20% federal) and ordinary income tax on depreciated assets (depreciation recapture). The buyer gets a "stepped-up" cost basis in the assets, allowing them to depreciate the full purchase price over time. In a stock sale: The buyer purchases the legal entity (shares of the corporation), taking on all historical liabilities, contracts, and obligations. The seller typically pays capital gains tax on the entire proceeds (favorable for the seller). The buyer gets no step-up in asset basis, resulting in lower future depreciation deductions (unfavorable for the buyer). Tax impact example: On a $2M sale with $500K basis, an asset sale might yield $375K in taxes for the seller. A stock sale might yield $225K — a $150K difference. Because of this tax asymmetry, buyers almost always prefer asset sales (to get step-up basis) while sellers prefer stock sales (to pay capital gains rates). The negotiated compromise is often a price premium (5–10%) in exchange for accepting a stock sale structure.