What Is My Small Business Worth in 2026? SDE, EBITDA and the $328,500 Gap
Ask ten owners what their business is worth and nine answer with a multiple. "Three times." "Four, because we're growing." It is the half that matters least: the same multiple on two different earnings numbers produces prices hundreds of thousands of dollars apart.
The argument in a real sale is about the number the multiple multiplies — which costs come out, which come back, whose salary counts. Get it wrong and you list at a price no buyer's bank will fund.
Quick answer
A small business is priced on its earnings, but "earnings" means at least four different numbers. Take a professional-services firm with $1,200,000 of revenue that nets $180,000 after paying its owner $150,000. Its seller's discretionary earnings are $330,000, so at 3× SDE the owner asks $990,000. The same figures on the industry method — 2–4× net profit and 0.75–1.5× revenue, averaged — give $945,000, and about $661,500 once a 30% discount is applied because the firm cannot run without its owner. That $328,500 gap is not a negotiating position. It is two different earnings numbers.
The four numbers, and which one buyers use
The same firm, four ways. Nothing about the business changes between rows — only which costs are the buyer's problem.
| Earnings number | What it is | This firm | What multiplies it |
|---|---|---|---|
| Net profit | After every cost, including the owner's $150,000 salary | $180,000 | The industry range: 2–4× → $360,000–$720,000 |
| SDE (seller's discretionary earnings) | Net profit plus the one working owner's pay and documented perks | $330,000 | 3× → $990,000 |
| EBITDA | Profit before interest, tax, depreciation and amortization, with a market-rate manager's salary left in as a cost | Below SDE by the cost of replacing the owner | The buyer's own comparables |
| Revenue | Sales, ignoring what they cost to produce | $1,200,000 | 0.75–1.5× → $900,000–$1,800,000 |
SDE and EBITDA answer different questions. SDE asks what the business will pay one working owner — the right number when the buyer steps into the seller's chair, because the salary the seller drew is money the buyer keeps. EBITDA asks what the business earns after paying someone to run it — the right number when a manager's salary already sits in the P&L and the buyer is acquiring cash flow rather than a job. A broker talks to a first-time buyer in SDE and to a private-equity acquirer in EBITDA; a multiple quoted without naming its base tells the other side nothing.
The business valuation calculator runs both tracks side by side: the industry range on net profit, the revenue method separately, the two averaged into a low–middle–high range, and the SDE method on its own line.
Add-backs: which ones survive a buyer's pen
An add-back is a cost in your books the buyer will not inherit, and every dollar you defend is worth the multiple. At 3× SDE, a $10,000 line a buyer strikes takes $30,000 off the price, and one that survives adds the same. That is why diligence takes eight weeks, and why it pays to price the business on both earnings numbers before a buyer does it for you.
What survives, in practice:
- One working owner's salary and payroll taxes. One: if you and your spouse both work in the business, one salary comes back and the other stays as a cost.
- Documented personal expenses run through the company: the weekend vehicle, the family phone plan, travel that was really a holiday. A line a buyer cannot trace to a receipt is not an add-back, it is a story.
- Genuine one-offs — the lawsuit settled once, the rebranding, the flood.
- Above-market rent to a related party, where the lease will reset at market.
- Interest and depreciation, in moving to SDE or EBITDA, since the buyer's debt and asset base differ.
What a buyer strikes:
- Deferred maintenance. Cutting the equipment budget for two years moves a cost into the buyer's first year, and diligence finds it.
- Marketing that drove sales. If cutting it cuts revenue, it is not discretionary.
- Family on payroll doing real work, which has to be replaced at market rate.
- "Run-rate" revenue — last month's contract annualized across a year that has not happened.
- Anything undocumented. Every dollar of profit you cannot prove is worth zero.
The order matters more than the list: add-backs are argued first, the earnings number is agreed, and only then does anybody discuss a multiple.
Owner dependence is a discount, not an insult
The largest adjustment on most small businesses is not an add-back. It is whether the earnings survive the owner leaving. If customers come for you, or you are the only one who can quote, sell or fix, the buyer is paying for cash flow that walks out with the seller. On the same firm, that one answer moves the number by $283,500:
| Can it run without you? | Discount | Middle estimate | What the discount costs |
|---|---|---|---|
| No — it would decline without me | 30% | $661,500 | $283,500 |
| Somewhat — it would wobble for a while | 15% | $803,250 | $141,750 |
| Yes — it runs without me | 0% | $945,000 | — |
That is a bigger swing than a full turn of multiple, and unlike the multiple it is inside your control. It takes 12 to 24 months: write down how the work is done, promote or hire someone who can quote and sell, move client relationships off your phone and onto the firm's. The buyer's test is blunt — could the owner take a month off?
One caveat about the middle number. The range averages the profit and revenue methods, and here they sit far apart: $540,000 against $1,350,000 before the discount. Each carries exactly half the weight, so the earnings line moves the price by $1.50 per $1 of profit — and taking this firm's profit to zero drops the middle to $675,000, or $472,500 after the owner discount, rather than leaving it on the revenue method. Sales you cannot turn into profit are worth half as much as sales you can. A buyer facing a spread this wide still argues from profit alone: 30% off the profit method by itself is $378,000, where a hard-nosed buyer opens, against a $661,500 middle and a $441,000 to $882,000 range. Deals in this shape close between the two, so run your own revenue, profit and dependence answer through the valuation engine and read all three lines.
The ask, and what a financed buyer can actually pay
Most small businesses are bought with borrowed money, so the price is capped twice: by what the business is worth, and by what its cash flow will service. Assume the buyer takes the owner's seat, draws the same $150,000, and so has $15,000 a month of SDE left for debt, with 10% down.
| The buyer's deal | Monthly payment | Cash for debt | Coverage | Underwriting |
|---|---|---|---|---|
| $990,000 ask, 10 years at 10% | $11,775 | $15,000 | 1.27 | Clears the 1.25 bank line — barely |
| Same, at 12% | $12,783 | $15,000 | 1.17 | Under the bank line |
| Same, over 7 years instead of 10 | $14,792 | $15,000 | 1.01 | No |
| Same, buyer needs $180,000 of pay | $11,775 | $12,500 | 1.06 | No |
| $661,500 middle estimate, 10 years at 10% | $7,868 | $15,000 | 1.91 | Comfortable |
The ask is not unfinanceable — it is exactly financeable, and only if nothing goes wrong. One rate point, three years of term, or a buyer whose household needs more than the seller drew, and the file fails. That is the mechanical reason asking and closing prices diverge, and why top-of-range deals get rescued with seller notes. Before setting a price, check what the payment on it does to a buyer's coverage ratio.
Where the comparables come from
The ranges above are a starting point, not evidence. The evidence in a negotiation is recent sales of businesses like yours — same industry, similar size, comparable region — which brokers and appraisers pull from subscription transaction databases and marketplace data. The ranges used here trace to the BizBuySell Insight Report, whose headline finding is worth remembering: the median small business sells for roughly two and a half times its owner earnings, not the four or five owners expect.
Comparables vary by geography, by year and by who is buying. Two things this arithmetic never sees are your balance sheet — debt, cash, equipment, property — and customer concentration: at identical earnings, a firm where one client is 40% of revenue is a different asset from one whose largest is 5%. A calculated range is the number you take to an appraiser, not the one you take to a buyer.
FAQ
Is my business worth three times profit or three times SDE?
Both, and they are different prices. On the firm above, 3× net profit is $540,000 and 3× SDE is $990,000 — the same multiple, a $450,000 spread, because SDE adds back the $150,000 salary. When anyone quotes a multiple, the first question is which earnings number it sits on.
My spouse and I both draw a salary. Can we add back both?
No. SDE convention adds back one working owner's compensation, because the buyer still has to pay somebody to do the second job. Add back the larger salary and leave the other in as a cost; if the second role is part-time, add back only the excess over the market rate for those hours. This is the commonest reason a broker's SDE and a buyer's SDE differ by six figures.
The buyer's bank appraised the business below our agreed price. What now?
The bank lends against the lower of the price and its own appraised value, so the gap is filled with more buyer cash, a seller note behind the bank debt, an earn-out, or a lower price. Above, the buyer's cash flow supports about $1,008,900 of price at 1.25 coverage with 10% down over ten years at 10% — but the appraisal caps the loan independently, and the lower cap wins.
I want to sell in two years. What actually moves the number?
Make the business run without you — worth $283,500 here, more than any multiple argument you will win. Then get three years of clean, accountant-prepared books, since undocumented profit is valued at zero, and move customers onto contracts, because predictable earnings sit at the top of a range. Every extra $10,000 of yearly profit is worth about $10,500 here after the owner discount, $15,000 without it.
Sources
- BizBuySell Insight Report — transaction data and median owner-earnings multiples, the source behind the industry ranges used here
- Investopedia — Seller's Discretionary Earnings, definition and add-back treatment
- U.S. Small Business Administration — 7(a) loan program terms, for the acquisition arithmetic
- Investopedia — Debt-Service Coverage Ratio, for the 1.25 threshold in the buyer table
General information, not financial, tax or legal advice. Multiples, comparables and lending terms vary by industry, region, year and buyer, and no calculated range is an appraisal. Before pricing a business for sale, get a written opinion of value from an accredited appraiser and take the structure to your own accountant and attorney.