How Buyers Value Small Businesses
A plain-English walkthrough of what most main-street buyers (and many brokers) actually do.
The core formula
For owner-operator “main-street” deals, buyers usually start with:
SDE (Seller’s Discretionary Earnings) = pre-tax profit + owner salary/benefits + add-backs for one-time or non-operational expenses. It’s the cash flow a single full-time owner could take home.
1) Recast SDE (get the earnings right)
- Normalize owner pay (treat one full-time owner as covered by SDE).
- Add-backs: owner health, personal auto, one-time legal/repairs, non-recurring projects.
- Remove non-business items (family phone plans, personal travel, etc.).
- Right-size rent if the seller owns the building (use market rent for apples-to-apples).
2) Apply the industry multiple (as a range)
Most industries trade in a band (e.g., 2.5×–3.5× SDE for many service businesses). Buyers pick a point in the band and then make small, transparent tweaks.
- Years operating (track record)
- Runs without the owner (manager/systems in place)
- Brand/Franchise (playbook & training)
- Customer concentration (big single client = discount)
- Trend & documentation (clean books = confidence)
- Essential equipment is assumed included in price.
- Inventory is usually added on top at cost.
- Real estate is priced separately (own/lease options change the deal math).
3) Sanity checks buyers run
Quick example (for intuition)
Say SDE is $120,000. Industry band is 2.5×–3.5×. The business has 6 years of history (+), runs without the owner (+), not a franchise.
- Base band: [2.5×, 3.0×, 3.5×]
- Tiny bumps: +0.10 (years) +0.20 (owner-independent) = +0.30
- Adjusted band: [2.8×, 3.3×, 3.8×]
- Fair range: $336k – $456k; base ≈ $396k (3.3× × 120k)
- Simple payback at base: 3.3 years (396k ÷ 120k)
- Inventory at cost adds on top; real estate separate.
This is illustration only. Real deals move with seasonality, concentration, lease terms, and lender appetite.
What moves the multiple?
- Documented SOPs, trained manager, low owner hours
- Diversified customers & suppliers
- Stable or growing year-over-year results
- Clean, accrual-based financials
- Transferable contracts, licenses, prime location
- Owner-dependent (relationships or key skills)
- 1–2 customers > 30% of revenue
- Declining revenue or undocumented add-backs
- Short/expensive lease or landlord uncertainty
- Poor books, cash skims, missing inventory controls
Important: This guide is an indicative overview to help you think about price. It is not an appraisal and must not be used for bank loans, insurance, tax, or legal purposes. SuccessionBridge has not verified any seller-provided figures.