How to Value a Client's Business (Fast and Defensibly)

The fastest defensible way to value a small business is the SDE (Seller's Discretionary Earnings) multiple method: normalize the owner's true earnings, then multiply by the range comparable businesses actually sold for. For most Main Street businesses that multiple lands around 2.5x cash flow, though it moves with size, industry, and growth trend. It won't hold up in litigation, but it will get an owner a real, defensible number in an afternoon instead of a $15,000 formal appraisal.

What is SDE and why does it matter?

SDE is the business's true earning power to a single owner-operator: net profit, plus the owner's salary, plus add-backs like personal expenses run through the business, one-time costs, and non-cash items like depreciation. It's the standard denominator for valuing businesses under a few million in revenue because most buyers in that range are individuals, not private equity ~ they want to know "what does this pay me."

Formula: Net Profit + Owner's Salary + Add-backs (personal expenses, one-time costs, interest, depreciation) = SDE

How do I calculate SDE step by step?

1. Start with net profit from the last 12 months (trailing twelve months, not last calendar year, if the business is mid-cycle).
2. Add back the owner's salary and payroll taxes. A buyer stepping in replaces this with their own labor.
3. Add back personal expenses run through the business ~ vehicle, phone, travel, family on payroll who don't work.
4. Add back one-time and non-operating items ~ a lawsuit settlement, a one-off equipment sale, COVID relief funds.
5. Add back interest and depreciation, since financing structure and accounting method don't reflect cash the business actually throws off.

Present a range and the reasoning, not just a number ~ that's what makes it defensible.

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What multiple should I apply?

This is where advisors earn their fee ~ picking a defensible multiple, not a round number. Two data points anchor the range:

• Typical small business SDE multiple: ~2.5x cash flow, per BizBuySell's 2025 Insight Report, which tracks actual closed transactions.
• Median cash flow of businesses sold in 2025 was $158,950, against a median sale price of $350,000 ~ back-calculating that pair puts the market's realized multiple around 2.2x, consistent with the 2.5x benchmark.

Adjust from that baseline for:

• Growth trend. Three years of rising revenue supports the high end of the range; a flat or declining trend pulls it down.
• Owner dependency. A business that runs without the owner commands a premium; one where the owner is irreplaceable gets discounted.
• Customer concentration. Revenue concentrated in 1~2 customers is a red flag buyers price in.
• Industry. Recurring-revenue and service businesses often clear higher multiples than low-margin retail.

How do I sanity-check the number?

Cross-check the SDE-multiple result against two other lenses before you present it:

• Asset value. If the business owns real estate or significant equipment, make sure the earnings-based number isn't below liquidation value ~ that's a red flag in the math, not a real answer.
• Owner's expectations vs. market reality. 58% of owners have never had their business formally appraised, per UBS Investor Watch 2023, so most clients are anchoring on a number they made up. Show them the comparable-sale logic, not just the output.

How should I present the valuation to the client?

Owners don't want a spreadsheet, they want a range and the reasoning behind it. Present:

• A range, not a single number ~ e.g. "$310k~$390k depending on how you handle X."
• The SDE calculation itself, so the client can see their real cash flow, often for the first time.
• What would move the number ~ this turns a valuation conversation into an advisory relationship instead of a one-time report.

Is a quick SDE valuation good enough to sell on?

For planning, financing conversations, and exit-readiness coaching, yes. For an actual closing, no ~ a buyer's lender or a litigation context needs a certified appraisal. Be explicit with clients about which one you're delivering; 80% of owners who eventually sell wish they'd started exit prep earlier, per UBS Investor Watch, and a quick valuation today is what gets that clock started.

SharePop's Unit Economics and Business Score tools generate this SDE-based range directly from a client's numbers, so you can walk into the valuation conversation with the math already done.