How the calculation works
Most small-business sales use one of two earnings bases: SDE (Seller's Discretionary Earnings) for owner-operated businesses, and EBITDA for larger businesses that already pay a market-rate manager.
SDE = net profit + owner's compensation + owner perks + one-time add-backs (depreciation, amortization, interest, and non-recurring expenses are often added back as well). It represents the total economic benefit an owner-operator extracts.
EBITDA = earnings before interest, taxes, depreciation, and amortization. It strips out financing and accounting choices to show operating cash flow, and is used when a buyer plans to hire a manager rather than run the business themselves.
The valuation formula is straightforward:
Enterprise value = earnings × multiple
Equity value = enterprise value − assumed debt
The multiple is the market-clearing variable. It reflects risk, growth, customer concentration, lease terms, and dozens of other factors a broker or buyer weighs. This calculator does not supply a multiple — enter one from a broker's opinion of value, a comparable sale in BizBuySell or a similar marketplace, or your industry's IBBA Market Pulse benchmark.
Worked examples
Example 1 — landscaping company (SDE method): The business earns $200,000 SDE. A business broker cites comparable sales at 3.0× SDE for similar landscaping businesses in this market. The owner carries $50,000 in equipment loans that transfer to the buyer.
| Item | Value |
|---|---|
| Annual SDE | $200,000 |
| Valuation multiple | 3.0× |
| Enterprise value | $600,000 |
| Assumed debt | $50,000 |
| Equity value (what seller receives) | $550,000 |
Example 2 — HVAC distributor (EBITDA method): The business generates $800,000 EBITDA. The IBBA Market Pulse benchmark for the sector is 4.0–5.0× EBITDA; the buyer and seller agree on 4.5×. No debt transfers.
| Item | Value |
|---|---|
| Annual EBITDA | $800,000 |
| Valuation multiple | 4.5× |
| Enterprise value | $3,600,000 |
| Assumed debt | $0 |
| Equity value | $3,600,000 |
Assumptions and limitations
- This calculator produces a preliminary range estimate only. A formal business appraisal by a Certified Business Appraiser (CBA) or Accredited in Business Valuation (ABV) professional is required for estate, gift tax, litigation, or SBA loan purposes.
- The multiple you enter drives the entire result. Multiples vary widely by industry, geography, customer concentration, contract type, and business size. The calculator does not validate or suggest multiples — you must source them from a qualified broker, a comparable-sale database, or an industry survey such as the IBBA Market Pulse.
- "Enterprise value" is the value of the operating business. "Equity value" subtracts debt and debt-like liabilities that transfer to the buyer. Working capital adjustments, earnouts, seller notes, and non-operating assets are not modeled here.
- SDE is most commonly used for businesses with one or two owners and under roughly $2–5 million in SDE. EBITDA is standard above that threshold and when a professional management team is already in place.
Frequently asked questions
- What's the difference between SDE and EBITDA?
- SDE adds back the owner's full compensation (salary, benefits, and perks) on top of net profit, because the new owner will decide how much to pay themselves. EBITDA uses a market-rate management salary already in the P&L, so it is not added back. SDE is higher than EBITDA for owner-operated businesses and is the standard for small businesses under ~$2M in discretionary earnings.
- Where do I find a reliable valuation multiple?
- The most practical sources are: (1) a business broker's opinion of value based on comparable sales in your region and industry; (2) the BizBuySell Insight Report, which publishes median sale price multiples by business category quarterly; and (3) the IBBA Market Pulse Survey, which covers lower middle-market deals ($1M–$50M). Industry trade associations sometimes publish acquisition data as well.
- Does enterprise value equal what I'll receive at closing?
- Not necessarily. Enterprise value is the price paid for the operating business. The seller receives equity value: enterprise value minus any debt or debt-like liabilities that transfer to the buyer. Working capital adjustments (a "peg" to a target balance), escrow holdbacks, seller notes, and earnout provisions all affect the final cash at closing.
- When do I need a formal business appraisal instead?
- IRS Revenue Ruling 59-60 sets the standard for estate and gift tax valuations — a qualified appraiser is legally required there. SBA lenders require a formal appraisal for loans above $250,000 when the seller and buyer are related parties. Litigation, divorce, and buy-sell agreement disputes all typically require a CBA- or ABV-credentialed appraiser. A calculator is a starting-point sanity check, not a substitute for those.
Sources
- BizBuySell Insight Report — quarterly median sale price multiples for small businesses sold (accessed 2026-10-03)
- IBBA & M&A Source Market Pulse Survey — broker-reported multiples by deal size (accessed 2026-10-03)
- IRS Revenue Ruling 59-60 — valuation factors for closely held business interests (accessed 2026-10-03)