What a Business Actually Sells For: SDE, Multiples, and Add-Backs

When a small or lower-middle-market business changes hands, the headline price almost never tracks revenue. It tracks earnings — specifically a normalized figure most buyers call Seller's Discretionary Earnings (SDE) or, for larger companies, EBITDA. SDE starts with net profit and adds back the things that exist because of this particular owner rather than the business itself: the owner's salary, personal vehicles run through the company, one-time legal fees, and discretionary spending that a new operator wouldn't carry.

That normalization is where most of the negotiation actually happens. A clean, defensible add-back schedule can lift the earnings base — and therefore the price — by a meaningful margin. A sloppy one invites a buyer to discount the whole number. This is why brokers spend so much time on the financials before a business ever hits the market: the story the numbers tell has to survive a buyer's accountant.

On top of the earnings base sits the multiple. A neighborhood service business might trade at 2–3x SDE; a business with recurring contracts, documented systems, and a manager already in place can command considerably more because the buyer is purchasing durability, not just cash flow. The multiple is really a measure of risk and transferability — how confident a buyer is that the earnings continue after the founder walks away.

The practical takeaway for owners is that value is built long before the listing. Three years of clean books, reduced owner-dependence, diversified customers, and a transition plan move both levers at once: a higher earnings base and a higher multiple on top of it. For buyers, the discipline is the reverse — verify every add-back, stress-test customer concentration, and price the business you'll actually run, not the one on the marketing sheet.