Most business owners find out their asking price is wrong when it costs them. A buyer's LOI arrives at 2.8x SDE on a business they thought was worth 4x. The deal dies or they take a 25% haircut. It didn't have to happen that way. Run the numbers before you need them.
According to the IBBA Market Pulse Q1 2026 report, the median small business transacts at 2.8x SDE for owner-operated deals under $1M of earnings, and 4.5x to 6.5x EBITDA for professionally managed businesses above $2M. The spread between those two numbers (and which one applies to you) is the core of business valuation.
This is a step-by-step guide. No filler. If you own a business and you're thinking about selling in the next one to five years, here's how to run the calculation.
SDE vs. EBITDA: Which Number to Use
The single most-asked question in small-business valuation: SDE or EBITDA?
The answer depends on your buyer pool.
SDE (Seller's Discretionary Earnings) is the earnings metric for businesses under roughly $1M of normalized profit. It answers: how much cash does one owner-operator take home if they work the business full-time?
The formula: Net Income + Owner's full W-2 salary + Owner's payroll taxes and benefits + Personal expenses run through the business + Interest + Taxes + Depreciation + Amortization + any one-time or non-recurring expenses.
A landscaping company with $183,000 net income, a $95,000 owner salary, $18,000 in owner benefits, $9,600 in interest, $12,000 in depreciation, and $14,400 in add-backs has SDE of $332,000. That's the number buyers negotiate from.
EBITDA is the metric for businesses above $1M to $2M of earnings, and for any business where a professional manager runs day-to-day operations. It adds back interest, taxes, depreciation, and amortization, but only the portion of owner compensation that exceeds a fair market replacement salary. If the market rate for a CEO of that business is $120,000 and the owner pays themselves $300,000, you only add back $180,000.
For the same business, SDE is always larger than EBITDA. That's why SDE multiples (typically 2x to 4x) are lower than EBITDA multiples (typically 4x to 8x). The math works out to roughly the same enterprise value. They're measuring from different baselines.
The practical rule: below $1M of normalized earnings, use SDE. Between $1M and $2M, run both. Above $2M, EBITDA is the only number that institutional buyers will price from.
Never mix them in the same valuation.
The Multiple: What Buyers Actually Pay in 2026
Once you have your earnings number, you apply a multiple. The multiple reflects risk, growth, and transferability. The ranges below are drawn from DealStats closed-transaction data and IBBA Market Pulse closings for 2025–2026.
| Sector | Owner-Operator (SDE) | Managed / PE (EBITDA) |
|---|---|---|
| Home services (HVAC, plumbing, electrical) | 2.5x – 5.0x | 4.0x – 7.0x (8x+ for roll-up platforms) |
| Landscaping & lawn care | 2.0x – 3.5x | 4.0x – 6.5x |
| Light manufacturing | 3.0x – 4.5x | 4.0x – 8.0x |
| Business-to-business services | 2.0x – 3.5x | 4.0x – 6.5x |
| E-commerce | 2.5x – 4.0x | 4.0x – 6.0x |
| Restaurants (independent) | 1.5x – 2.5x | 3.0x – 5.0x |
| Professional services | 2.0x – 3.5x | 4.0x – 6.5x |
| SaaS (sub-$1M ARR) | 3.0x – 5.0x SDE | 5.0x – 15.0x ARR |
These are ranges, not rules. The actual multiple your business commands depends on five factors.
Owner dependency. If you are the business: you own the client relationships, you quote every job, you make every key decision. Buyers apply a discount. How much? Typically 0.5x to 1.5x SDE off the top. A well-systematized business with documented processes and a management layer below the owner commands a premium.
Customer concentration. One customer representing more than 20% of revenue is a risk flag. Above 30%, expect the buyer to escrow a portion of the purchase price tied to customer retention. Below 10% for any single customer is the clean profile.
Revenue recurrence. Contracts, subscriptions, and recurring service agreements push multiples up. Project-based or one-time revenue pulls them down. The difference between 40% recurring revenue and 80% recurring revenue can be a full turn of EBITDA on the multiple.
Growth trajectory. A business growing 10% per year on trailing twelve months gets a different look than a flat or declining one. Three years of consistent growth (even modest growth) is more valuable than one strong year.
Documentation quality. Clean books, three years of tax returns that reconcile to profit-and-loss statements, and properly maintained asset records compress the buyer's diligence risk. Incomplete records, cash transactions not properly captured, or a history of aggressive owner add-backs create skepticism and reduce the multiple.
The Three-Method Check
Professional appraisers don't rely on one method. They triangulate. Three approaches exist.
Income approach: the primary method for most operating businesses. Calculate SDE or EBITDA, apply the appropriate sector multiple, and arrive at an indicated value. This is what 80% of small-business deals are priced on.
Market approach: compare recent closed transactions in your industry and size range. BizBuySell publishes quarterly sold data by industry. DealStats has 35,000+ closed transactions with multiples. If your income-approach value falls in line with what comparable businesses actually sold for, you're on solid ground. If it's 40% higher than comp transactions, recalibrate.
Asset approach: the floor. What are the hard assets worth in liquidation? Inventory, equipment, real estate, receivables. For most service businesses, this number is well below the income-approach value, which tells you the premium you're capturing is goodwill and cash flow, not physical assets. If your income-approach value is close to your asset floor, the business has a profitability problem.
Run all three. Let the income approach drive the price. Let the market approach confirm it. Let the asset approach set the floor you won't go below.
Who's Buying and Why It Changes Your Number
This is the part most sellers miss entirely. The same business has a different value to different buyer types. The $1M SDE landscaping company is worth more to a private equity platform doing a roll-up than to a first-time buyer on BizBuySell. Not because the business changed. The buyer's cost of capital and exit strategy are different.
Individual SBA buyers are typically first-time operators financing 80% to 90% of the purchase price through an SBA 7(a) loan. Their cost of capital is high. They pay cash flow from day one. They price on SDE and pay 2.5x to 3.5x for most service businesses. This is the dominant buyer pool for businesses under $500K SDE.
Search fund operators and ETA searchers are a different profile: MBA-educated operators with institutional backing buying to own and operate for a five-to-ten-year hold. They use SDE metrics at smaller sizes and EBITDA at larger ones. They're serious buyers who move deliberately, run real diligence, and bring institutional rigor to the transaction. PGC's acquisition model is built around this approach: how search fund operators value a business differs from how an SBA buyer does, and knowing which buyer pool you're in determines how to position your business.
Private equity platforms and family offices are buying businesses above $2M of EBITDA. They pay 4x to 8x EBITDA. They have lower cost of capital, multiple-expansion at exit, and bolt-on synergies that make each marginal acquisition worth more. If your business clears $1.5M of EBITDA and you only market it to owner-operators on BizBuySell, you're likely leaving 30% to 50% on the table.
Identify your buyer pool first. Then calculate the earnings metric that pool uses. Then apply that pool's multiples.
Five Valuation Mistakes Sellers Make
1. Using a generic multiple. "5x EBITDA" is the number everyone quotes at a cocktail party. It's the median for a hypothetical middle-market deal that doesn't match your business. Sector matters. Size matters. Recurring revenue percentage matters. A single generic multiple gives you a number that's probably wrong by 30% in one direction or the other.
2. Not normalizing owner compensation correctly. If you pay yourself $400,000 from a business that a replacement CEO would run for $130,000, you need to add back $270,000 — not $400,000. Buyers scrutinize the add-back schedule. An aggressive or indefensible add-back list erodes trust in every other number on your P&L.
3. Ignoring owner dependency. The most common value killer in small business is the one nobody wants to talk about. If you can't take two weeks off without the business suffering, buyers can see it. They discount it. Document your processes, train your team, and reduce client relationship concentration in your name before you list. This work takes 12 to 24 months. Not something you do in the 30 days before going to market.
4. Selling on a down year. Buyers negotiate on trailing twelve months. If last year was 20% lower than the year before, expect the offer to reflect that. If you know revenue is recovering, sell on a trailing twelve months that shows the upturn, or wait until you have 6 to 12 months of the recovery documented.
5. Not having three years of clean financials. Tax returns and P&Ls should reconcile. Personal and business expenses should be clearly separated. If a buyer's accountant finds discrepancies between your stated earnings and your filed returns, the deal stalls or dies. Clean books are not just a diligence convenience. They're a negotiating asset.
Run the Number Now, Not When You Need It
The operators who exit well started thinking about valuation two to three years before they went to market. They knew their SDE. They reduced owner dependency. They built recurring revenue. They kept clean books. When the time came, they had leverage.
The operators who get surprised are the ones who called a broker the same week they decided to sell. They take whatever the first buyer offers because they haven't built the business for transferability.
Here's the quick calculation you can do today: take last year's net income, add back your full salary, benefits, interest, depreciation, amortization, and any clear personal expenses. That's your SDE. Look at the sector multiples table above and apply the range that fits your revenue recurrence, customer concentration, and growth profile. That's your indicative value range.
If the number surprises you, you have time to change it. That's the entire point.
Sellers who work with an acquisition-focused partner (not a generalist broker) during the preparation phase consistently achieve better outcomes. If you're in the $500K to $5M EBITDA range and thinking about a structured exit to a qualified operator, understanding what search fund buyers look for is the right starting point.
