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Business Valuation Methods Explained

Understanding how businesses are valued is essential for both buyers and sellers. This guide explains the most common valuation methods, what drives multiples, and how to calculate what your business might be worth.

Last updated: May 202520 min read

The Two Key Metrics: SDE and EBITDA

Most small and mid-sized businesses are valued as a multiple of earnings. The two most common metrics are SDE and EBITDA. Which one applies depends on your business size and structure.

SDE (Seller's Discretionary Earnings)

Best for: Owner-operated businesses under $5M revenue

SDE Calculation:

  • Net Income
  • + Owner's Salary
  • + Owner's Benefits
  • + Depreciation
  • + Interest Expense
  • + One-Time Expenses
  • + Personal Expenses
  • = SDE

Typical multiples: 2.0x - 4.5x

EBITDA

Best for: Larger businesses with professional management

EBITDA Calculation:

  • Net Income
  • + Interest Expense
  • + Tax Expense
  • + Depreciation
  • + Amortization
  • = EBITDA

Typical multiples: 4.0x - 10.0x

What Drives Valuation Multiples

Not all businesses with the same earnings are worth the same. Several factors push multiples higher or lower.

Value Drivers (Higher Multiple)

Recurring Revenue
Contracts, subscriptions, maintenance agreements
+0.5 to +2.0x
Low Owner Dependency
Business operates without the owner
+0.5 to +1.0x
Strong Growth
15%+ annual revenue growth
+0.5 to +1.5x
Diversified Customers
No customer over 10% of revenue
+0.25 to +0.5x
Size/Scale
Larger businesses command premiums
+0.5 to +2.0x

Value Detractors (Lower Multiple)

High Owner Dependency
Owner is primary salesperson or technician
-0.5 to -1.0x
Customer Concentration
Top customer is 25%+ of revenue
-0.5 to -1.0x
Declining Revenue
Revenue shrinking year over year
-0.5 to -1.5x
Small Size
Under $500K SDE
-0.5 to -1.0x

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Valuation Multiples by Industry

Multiples vary significantly across industries based on growth potential, recurring revenue, and buyer demand. Here are typical ranges for common industries.

Home Services

IndustrySDE MultipleEBITDA Multiple
HVAC2.5x - 4.5x4x - 7x
Plumbing2x - 4x3.5x - 6.5x
Electrical2.5x - 4.5x4x - 7x
Roofing2x - 4x3.5x - 6x
Landscaping1.5x - 3.5x3x - 5.5x
Pest Control3x - 5.5x5x - 8.5x

Healthcare

IndustrySDE MultipleEBITDA Multiple
Dental Practice2.5x - 5x4.5x - 8x
Veterinary Practice3x - 6x5x - 9x
Urgent Care3x - 6x5x - 9x
Home Health2.5x - 5.5x4.5x - 8.5x
Physical Therapy2.5x - 4.5x4x - 7x

Professional Services

IndustrySDE MultipleEBITDA Multiple
Accounting & CPA1x - 2x3x - 6x
MSP / IT Services3.5x - 7x6x - 11x
Staffing & Recruiting2x - 5x4x - 8x
Marketing Agency2x - 5x4x - 8x

Manufacturing

IndustrySDE MultipleEBITDA Multiple
Precision Manufacturing3x - 6x5x - 9x
Food Manufacturing3x - 6x5x - 9x
Industrial Manufacturing3x - 6x5x - 8.5x

Frequently Asked Questions

What is the difference between SDE and EBITDA?

SDE (Seller's Discretionary Earnings) includes owner salary and benefits, making it ideal for owner-operated businesses. EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) is used for larger businesses with professional management where owner compensation is already at market rate.

Why do multiples vary so much by industry?

Multiples reflect perceived risk and growth potential. Industries with recurring revenue (pest control, MSPs) command higher multiples. Industries with low barriers to entry or high owner dependency trade at lower multiples. Buyer demand also affects multiples.

How do I calculate my business's SDE?

Start with net income from your tax return. Add back: owner's salary and benefits, depreciation and amortization, interest expense, one-time expenses, personal expenses run through the business, and any above-market rent paid to yourself.

Should I get a professional valuation?

For businesses over $1M in value, a professional valuation from a certified appraiser can help with negotiations, financing, and tax planning. For smaller businesses, industry multiples and broker opinions often suffice.

Ready to Value Your Business?

Use our calculator for a quick estimate, or talk to a deal advisor for a more detailed analysis.