Question 1

How do you value a small business?

Accepted Answer

Small businesses are most commonly valued using a multiple of Seller's Discretionary Earnings (SDE). The multiple varies by industry, typically ranging from 2x to 5x SDE. Factors that increase the multiple include recurring revenue, low owner dependency, growth trends, and strong customer diversification.

Question 2

What is an SDE multiple?

Accepted Answer

An SDE multiple is the factor applied to a business's Seller's Discretionary Earnings to estimate its market value. For example, a business with $200K SDE and a 3x multiple would be valued at $600K. Multiples vary by industry, size, growth rate, and quality of earnings.

Question 3

What is a good DSCR for buying a business?

Accepted Answer

A Debt Service Coverage Ratio (DSCR) of 1.25x or higher is typically required by SBA lenders. This means the business generates $1.25 in cash flow for every $1.00 in annual loan payments. A DSCR below 1.0x means the business cannot cover its debt payments from operations.

Question 4

What's the difference between SDE and EBITDA for valuation?

Accepted Answer

SDE includes the owner's salary and personal expenses as add-backs, making it the standard metric for small, owner-operated businesses. EBITDA does not add back owner compensation and is used for larger businesses with professional management. SDE multiples are typically lower than EBITDA multiples for the same business.

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