Owners price their business three ways: what they need to retire, what they’ve put into it, or what a friend said a similar business sold for. Buyers price it one way: what it earns, times a multiple, adjusted for risk. The sooner you see the business through the buyer’s math, the faster you’ll get to a number that actually closes.

Start with seller’s discretionary earnings

Seller’s discretionary earnings (SDE) is the total financial benefit one full-time owner-operator gets from the business in a year. It starts with the net profit on your tax return and adds back everything that’s really owner compensation or a non-cash or one-time item:

• Your salary and payroll taxes on it (and any family member paid who doesn’t really work there).
• Owner perks run through the business: vehicle, phone, health insurance, travel, meals.
• Depreciation and amortization.
• Interest on business debt (the buyer will have their own financing).
• One-time expenses: a lawsuit, a flood, a one-off equipment repair, startup costs for a second location you closed.

Then subtract anything the buyer will have to pay that you don’t: for example, if your spouse works 30 hours a week for free, a buyer has to hire that person, so their wage comes off SDE.

A worked example

This business shows $48,000 of profit on paper and puts $125,000 a year in the owner’s pocket. The second number is the one buyers pay for.

The multiple — and why it moves

For businesses with SDE under about $500K, sale prices commonly fall in the range of roughly 1.5 to 3 times SDE, with most Main Street businesses landing somewhere in the middle. The example above, at 2.3×, is a business worth around $290,000 before inventory. The spread between 1.5× and 3× on that same business is $190,000 — so the factors that move the multiple matter more than almost anything else you can do.

What pushes the multiple up

• Clean, verifiable books. Returns, P&L and bank statements that reconcile. Every dollar a buyer can’t verify is a dollar they discount.
• The business runs without you. A manager in place, documented processes, staff tenure. Buyers pay for a business, not a job.
• Recurring or repeat revenue. Contracts, memberships, route customers, maintenance agreements.
• A long, assignable lease at market rent — or ownership of the real estate (priced separately).
• Diversified customers. No single customer over 10–15% of revenue.
• Stable or growing trend over three years. Buyers pay less for a business that peaked two years ago.
• Financeable. If a bank or SBA lender will lend on it, the buyer pool is bigger and the price is higher.

What pushes it down

• Owner dependence. You are the chef, the salesman and the relationship. The buyer is buying a job and pricing it that way.
• Cash income that isn’t on the return. It cannot be financed and will not be paid for.
• Customer concentration. One contract that is 40% of revenue is a risk the buyer can’t control.
• A short lease or a landlord who won’t commit to assignment.
• Deferred maintenance on equipment, vehicles, or the premises.
• Declining revenue, pending litigation, or regulatory exposure.

What gets added on top

The SDE multiple typically values the operating business: equipment, goodwill, name, customer relationships, trained staff. Two things are normally priced in addition:

• Inventory, at your cost, counted at closing. A $290,000 business with $35,000 of inventory on the shelf is a $325,000 deal.
• Real estate, if you own the building. It’s appraised and sold (or leased to the buyer) as a separate asset. Owning the real estate often makes the business easier to sell because the buyer’s occupancy cost is secured.

The sanity check every buyer runs

Whatever the multiple says, a buyer asks one question before offering: after paying for this business, can I pay myself and pay the loan? Using the example — a $290,000 purchase with 80% financed over 10 years at current small-business rates produces debt service somewhere in the mid-$30,000s per year. That leaves roughly $90,000 for the new owner to live on and reinvest. That works. Push the price to $400,000 and the debt payment eats half the earnings; the buyer either walks or the lender declines.

If your asking price fails this test, it is not a “low offer” problem. It’s a pricing problem, and the market will tell you the same thing more slowly and more expensively.

Three things you can do in the next 90 days that raise the number

1. Clean up the books. Separate personal from business, stop running cash, and get a year-to-date P&L your CPA would sign.
2. Write down what only you know. Supplier contacts, pricing, the opening checklist, the three customers who need a call every Monday. Every page of that document is a reason a buyer pays more.
3. Talk to your landlord. Get the assignment clause clarified or a renewal option added. A buyer who sees eight years of secured occupancy pays more than one who sees fourteen months.

Once you have your SDE and an honest read on your multiple, you’re ready to talk to a buyer. If you’d like our read on your number — confidentially, with no obligation — tell us what you have. We’ll show you how we got to the figure.