The short answer: Value a small business in four steps, (1) find its SDE (real owner earnings), (2) pick an industry multiple (2026 median ~2.7× SDE), (3) multiply and adjust for quality, (4) sanity-check that the cash flow covers the loan at a safe DSCR. Example: $180,000 SDE × 2.8× = $504,000, before quality adjustments. Run it in the valuation calculator.
The 4 steps at a glance
| Step | What you do | This deal |
|---|---|---|
| 1 · Find SDE | Rebuild the owner's true earnings from the tax return | $180,000 |
| 2 · Pick the multiple | Plumbing runs ~2.6× SDE in 2026 | 2.6× |
| 3 · Multiply | $180,000 × 2.6 | $468,000 |
| 3b · Adjust for quality | Owner does most of the sales → shade down ~5% | ≈ $445,000 |
| 4 · Sanity-check | SDE − $70k your salary = $110k; loan payment ~$68k → DSCR 1.6× | Passes |
Follow those five rows and you can value almost any Main Street business. Below, each step in detail.
Step 1, Find the SDE
You cannot value a business off the profit line of a tax return. Owners run personal expenses through the business and pay themselves in ways that hide the true earnings. So you rebuild the real number: Seller's Discretionary Earnings (SDE).
SDE = net profit + one owner's salary & perks + interest + taxes + depreciation + one-time add-backs
SDE is the total yearly benefit to a single owner-operator. It's the right base for most Main Street businesses (usually under ~$1M in earnings). Larger, manager-run businesses use EBITDA instead. For the full rebuild from a tax return, see the SDE deep dive and the rules on legitimate vs aggressive add-backs.
Step 2, Pick the multiple
The multiple is what buyers pay per dollar of SDE. Start with the industry average, then you'll refine it in Step 3.
| Industry | SDE multiple |
|---|---|
| Car wash | 4.7× |
| Childcare | 3.4× |
| HVAC | 2.8× |
| Plumbing | 2.6× |
| Cleaning | 2.3× |
| Restaurant | 2.26× |
Source: BizBuySell Insight Report (2026). Full set: industry multiples. The 2026 median across all small businesses was about 2.7× SDE.
What you'll see in the real market
These medians are pulled down by very small, owner-dependent listings. In practice, most brokered deals worth buying, especially in the $250k, $500k SDE range, and in hot trades like HVAC, are marked closer to 3 to 4× SDE, sometimes higher. Use the industry number as your floor and anchor, not a promise: a clean, semi-absentee business with recurring revenue will be priced above it, and that's normal. The point of this method isn't to win the multiple argument, it's to know what you're paying for and confirm the cash flow still covers the loan.
Step 3, Adjust for quality
Two businesses in the same industry are not worth the same multiple. Move within the range based on what makes the business safer or riskier to own:
- Pushes the multiple up: recurring revenue or contracts, a manager already running it, clean books, a diverse customer base, and steady growth.
- Pushes the multiple down: the owner is the business, one customer is a big share of sales, messy records, declining revenue, or a lease that's about to end.
The owner-dependence test
Ask: "If the owner disappeared for 60 days, what happens?" If the answer is "nothing much," pay toward the top of the range. If it's "the business dies," pay less, or walk. This one question moves more value than any other.
Step 4, Sanity-check against cash flow
A price only counts if the business can pay for itself. Take SDE, subtract a fair market salary for you (the new owner-operator), and see whether what's left covers the loan payment with a cushion. That cushion is the debt-service coverage ratio (DSCR), and SBA lenders want at least 1.15×, 1.25×.
| Line | Amount |
|---|---|
| SDE | $180,000 |
| Less: your market salary | −$70,000 |
| Cash flow available for debt | $110,000 |
| Annual loan payment (~$400k, 10 yr, 10.5%) | ≈ $65,000 |
| DSCR = $110,000 ÷ $65,000 | 1.69× |
1.69× is well above the 1.25× target, the price is safe. If a valuation fails this test, the price is too high, no matter what the multiple says. That's the bridge from valuation to your actual offer.
The multiple tells you the market price. Cash flow tells you the safe price. Never let the first one win the argument.
Run these four steps automatically
Enter SDE and industry for a value range, then test the loan with the DSCR tool.
Keep going
Frequently asked questions
Four steps: find SDE, pick an industry multiple, multiply and adjust for quality, then sanity-check the price against cash flow to confirm it covers a loan at a safe DSCR of 1.15×, 1.25×.
Start with the industry average, about 2.7× SDE at the 2026 median, then move within the range for quality. Recurring revenue and low owner dependence push it up; customer concentration and owner dependence push it down. See multiples by industry.
Subtract a market salary for yourself from SDE, then divide by the annual loan payment. That's the DSCR. Lenders want at least 1.15×, 1.25×. If the price fails that test, it's too high.
Yes, buyers routinely run their own valuation to set an opening offer. Just get a professional appraisal and full due diligence before you sign, because your estimate uses the seller's numbers, which still need to be verified.
Sources
- Median multiple (~2.7× SDE) and market data, BizBuySell Insight Report (2026).
- Industry multiples, Acquisition Ace multiples data (2026).
- DSCR underwriting minimums, SBA lender guidance, 2025 to 2026.
