Most small businesses are priced off one number: how much money they actually put in the owner's pocket each year. Understand that, and you'll never be at the mercy of an asking price again.
SDE — the number that matters for small businesses
SDE stands for Seller's Discretionary Earnings. In plain English: the total financial benefit one owner-operator gets from the business in a year. You start with the business's profit, then add back things that are really benefits to the owner:
- The owner's salary
- Owner perks run through the business (car, phone, travel, health insurance)
- One-time or non-recurring costs (a lawsuit, a one-off repair) that won't happen again
- Interest, taxes, and depreciation (accounting items, not day-to-day cash)
Those additions are called "add-backs." The result is the real earning power a new owner would step into. Watch add-backs carefully in due diligence — sellers love to pad them.
EBITDA — for bigger businesses
Once a business is large enough to have a manager running it (not just the owner), buyers use EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. Same idea (true earning power), but it doesn't add back an owner's salary, because a bigger business pays a real manager. Rule of thumb: small owner-run business → SDE; larger manager-run business → EBITDA.
The multiple — what turns earnings into a price
A business is worth its earnings times a multiple. Main-street small businesses typically sell for roughly 2 to 4 times SDE — often around 2.5–3x. So:
A salon with $150,000 SDE at a 2.5x multiple ≈ $375,000 price.
What pushes the multiple UP
- Growing revenue and profit
- Recurring/repeat customers (predictable income)
- Runs without the owner (a real team and systems)
- Diverse customers (no single client is a huge chunk)
- Clean books and a long track record
What pushes it DOWN
- Declining sales
- The business is the owner — it falls apart if they leave
- One customer is 30%+ of revenue (concentration risk)
- Messy or unverifiable financials
Asking price is not value
Sellers set asking prices emotionally and optimistically. Your job is to calculate value from the real SDE and a fair multiple, then negotiate from there. The number you build up yourself is the one that protects you.
Next: how to actually pay for it — you may need less cash than you think.