Start with SDE, then question every add-back
SDE is net profit plus owner salary, owner benefits, interest, depreciation, amortization, and genuine one-time expenses. Sellers pad it. Add back a one-off legal settlement, yes. Add back "marketing we did not need" or a family member's salary who actually did the work, no. Every $10,000 of fake add-back inflates the price by $25,000 to $40,000 at typical multiples.
Typical SDE multiples
| Business type | Typical SDE multiple |
|---|---|
| Owner-operated retail or restaurant | 1.5x to 2.5x |
| Home services / trades | 2.0x to 3.5x |
| Distribution and light manufacturing | 2.5x to 4.0x |
| Established B2B services | 3.0x to 4.5x |
| Recurring-revenue software | 4x to 8x (often on EBITDA or ARR) |
Businesses with over roughly $1M of earnings shift to EBITDA multiples and price higher, because a buyer can hire a manager instead of working in the business.
Adjust the multiple for real risk
- Customer concentration above 20 percent from one client: subtract 0.5x or more.
- Owner is the main salesperson or holds the license: subtract 0.5x to 1.0x.
- Declining revenue over three years: subtract, and price on the trailing year, not the peak.
- Contracted recurring revenue, documented systems, a working manager: add 0.5x to 1.0x.
- Short or unassignable lease on a location-dependent business: material discount.
The check most buyers skip: debt coverage
If you finance the purchase, SDE has to cover debt service, your living wage, and working capital. Take SDE, subtract a market manager salary, and divide by annual loan payments. Lenders want that ratio at 1.25 or better. If a deal only works at 1.05, the price is too high regardless of the multiple.