Short answer
- Buyers and lenders value the earnings left after paying someone to replace you, not SDE.
- The multiple depends on owner dependence, recurring revenue, concentration, clean books, size and team depth, not an industry average.
- If your buyer uses an SBA loan, the price is capped by an independent valuation and a 1.25x debt coverage test on historical earnings.
Start with the right earnings number
Business owners usually hear one number: seller's discretionary earnings (SDE). Buyers and lenders use three.
| Measure | What it is | Who uses it |
|---|---|---|
| SDE | Pre-tax profit plus owner salary and benefits, one-time and personal costs, interest and depreciation | Listings and smaller owner-operated businesses |
| Adjusted earnings | SDE minus a market salary for whoever replaces the owner | Lenders, and any buyer who won't run it full time |
| EBITDA | Earnings before interest, taxes, depreciation and amortization, with a market salary already in expenses | Private equity and larger businesses |
The gap between SDE and adjusted earnings is the cost to replace you. In a business where the owner is the general manager, lead estimator and top salesperson, that can be $100,000 to $200,000 a year or more. Multiply that by the market multiple and you see why a listing price and a bank's number can be hundreds of thousands of dollars apart.
The line most valuations leave out
Here's the example from my home page, which my free Value Snapshot reproduces:
| Pre-tax profit | $420,000 |
|---|---|
| + Owner salary and benefits | $180,000 |
| + One-time and personal costs | $45,000 |
| + Interest and depreciation | $60,000 |
| = SDE | $705,000 |
| - Manager to replace the owner | ($110,000) |
| = Earnings a buyer will pay for | $595,000 |
At an illustrative 3x to 4x, that's $1.79M to $2.38M. Multiplying SDE instead would claim $2.12M to $2.82M, a $330K to $440K overstatement that a buyer's lender will find.
What moves your multiple
I won't quote you a single "industry multiple." Those averages hide the reasons two similar businesses sell for very different prices. These are the drivers buyers actually price:
- Owner dependence. If customers ask for you by name, or you hold the license, the key relationships and the estimating, buyers discount for the risk that value leaves with you.
- Recurring revenue. Service agreements, memberships and repeat commercial accounts earn a premium because the next year's revenue is more predictable.
- Customer concentration. Buyers get nervous when one customer is more than 10% to 15% of revenue.
- Clean books. Accrual-basis financials, reviewed by an outside CPA, with documented add-backs. Murky add-backs get negotiated against you.
- Size. Larger businesses get higher multiples, not just bigger prices. In home services, private equity often pays far more per dollar of EBITDA for a $3M+ EBITDA platform than for a sub-$1M tuck-in.
- Team depth. A tenured second layer of managers, on documented pay plans, is worth real money.
- Trend. Three years of steady or rising earnings beats one great year.
For market context: BizBuySell reported a median small-business sale price of $350,000 in Q3 2026, up 17% from a year earlier, with average cash flow multiples up 2.6%, while buyers grew more selective about financing.
The lender sets your real price ceiling
If your likely buyer uses an SBA loan, two rules cap what they can pay, as of October 1, 2026:
- Total debt can't exceed an independent, credentialed valuation. Anything above it has to be paid in cash or a seller note on full standby.
- The deal has to show 1.25x debt coverage on historical earnings, after a market salary for whoever runs the business.
Here's how the second rule caps price. Take a business with $500,000 of SDE that needs a $120,000 manager, leaving $380,000 for debt. Assume 15% down and a 10-year SBA loan at 10%:
| Asking price | Multiple of SDE | SBA loan | Annual payment | Coverage |
|---|---|---|---|---|
| $2,000,000 | 4.0x | $1,700,000 | $269,600 | 1.41x, passes |
| $2,250,000 | 4.5x | $1,912,500 | $303,300 | 1.25x, at the limit |
| $2,500,000 | 5.0x | $2,125,000 | $337,000 | 1.13x, fails |
At $2.5M, an SBA buyer can't close without bringing a lot more cash or a large standby note from you. Price it at $2.25M or less, or fix the earnings first.
What to fix in the next 12 months
- Move to accrual accounting and get a CPA review, if you aren't there.
- Stop running personal expenses through the business. Every add-back you remove now is one you don't have to defend later.
- Hire or promote the person who would replace you, and let them run things for a few months.
- Put service agreements in writing and on auto-renew.
- Reduce any customer above 15% of revenue, or lock them into a longer contract.
- Document pay plans, processes and pricing so a buyer sees a system, not a person.
How I value a business
I start where the buyer's lender will: recast earnings, replace the owner at market pay, test coverage under the current SBA rules, then apply a multiple range justified by the drivers above. My assessment is a working value for decisions. It isn't a credentialed appraisal, and if you need one for SBA financing, an estate or a buyout, I'll coordinate it.
FAQ
What is SDE?
Seller's discretionary earnings: pre-tax profit plus the owner's salary and benefits, one-time and personal costs, interest and depreciation. It shows what the business pays one full-time owner-operator.
What's the difference between SDE and EBITDA?
EBITDA already includes a market salary for management in expenses. SDE adds the owner's pay back. For the same business, SDE is higher by roughly the cost of the owner's role.
Why is a buyer's offer lower than my broker's valuation?
Usually because the broker multiplied SDE, while the buyer and lender subtract a market salary for whoever replaces you before applying a multiple, and test the price against SBA debt coverage rules.
Do I need a formal business appraisal to sell?
Not to sell, but if your buyer uses an SBA loan, the lender will order an independent credentialed valuation, and total debt can't exceed it.
Sources
- BizBuySell Q3 2026 Insight Report release
- How PE values home-service businesses (ServiceMag)
- SBA SOP 50 10 8.1 summary (Accredited)
This guide is general information, not legal, tax or lending advice. SBA rules and Florida law change; confirm current terms with your lender, attorney and CPA.