The five numbers that tell you a business is worth buying

1. SDE, the earnings that actually matter

SDE (seller's discretionary earnings) is the total benefit one full-time owner-operator takes home: net profit plus the owner's salary, interest, taxes, depreciation, and legitimate add-backs. It is the foundation of every other number here. If a listing leads with revenue and buries SDE, treat that as your first signal to dig. Verify SDE against tax returns, not just the seller's spreadsheet.

2. The multiple, is the price defensible?

Divide asking price by SDE and you get the multiple. At the small-business end, roughly 2.7x SDE is typical, with the exact figure varying by industry, size, and quality. Clean books and recurring revenue earn a higher multiple; a fragile, owner-dependent shop should trade lower. Compare against industry norms before you accept the sticker.

3. DSCR, does it actually cash-flow?

Debt-service coverage ratio is verified cash flow divided by the annual loan payment. SBA lenders generally want at least 1.15x to 1.25x; a healthy acquisition often lands higher. DSCR is where an inflated SDE gets exposed: strip the questionable add-backs, then check whether the deal still covers the note. If it only pencils on the seller's most optimistic numbers, the real price is lower.

4. Owner dependence, does value walk out the door?

If the business is the owner, their relationships, their know-how, their hands on every job, then a lot of what you are buying leaves at closing. Ask how many hours the owner really works, who holds the key accounts, and what breaks the day they stop answering the phone. Low owner dependence is one of the strongest signals a deal is durable.

5. Customer concentration, one client or many?

One customer at 40% of revenue is a single point of failure. If they leave, the loan payment does not. Ask for revenue by customer for the last two years. A broad, sticky base is worth paying up for; heavy concentration should either lower the price or come with a plan to hold and diversify that base.

A listing tells you what the seller wants you to feel. These five numbers tell you what is true. Trust the numbers.

Frequently asked questions

Sources

1. Small-business pricing norms (~2.7x SDE, ~$350k median), BizBuySell Insight Report.
2. Industry-by-industry valuation multiples, Acquisition Ace multiples data.
3. DSCR and cash-flow underwriting for acquisitions, sba.gov 7(a) program.

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