What Every Business Owner Gets Wrong About Their Valuation
Revenue is vanity. SDE is reality.
Words by
Matan Michael
The most common thing I hear from business owners before we run a valuation is a number they've already decided on. It's usually based on revenue, something a friend told them, or a gut feeling built over years of hard work. It's almost always wrong. Not because the business isn't valuable — but because revenue is the wrong measuring stick entirely.
Buyers Buy Earnings, Not Revenue
Buyers don’t buy revenue. They buy earnings — the cash flow they’ll actually take home after running the business. That figure is called Seller’s Discretionary Earnings, or SDE. It starts with net profit and adds back the owner’s salary, personal expenses run through the business, one-time costs, and non-cash items like depreciation. A company doing $2M in revenue but netting $150K after a $300K owner salary isn’t a $2M business — it’s worth roughly $450K to $600K, because that’s what a buyer is actually acquiring. This is the single biggest reason deals fall apart at the LOI stage.
What Actually Moves Your Multiple
Once you have a clean SDE figure, the next question is what multiple a buyer will apply. Main street businesses typically see 2x to 4x SDE, while lower middle market companies with recurring revenue and a management team can reach 5x to 7x EBITDA or higher. Documented recurring revenue, a team that doesn’t depend on you, transferable customer relationships, and clean books push the multiple up. Owner dependency, customer concentration, and undocumented add-backs pull it down — and most of these are fixable if you know about them before you go to market.
Why Timing the Valuation Matters
The best time to understand your valuation is long before you plan to sell. Getting a clear, honest number early shows you exactly which gaps are costing you value — owner dependency, messy books, thin recurring revenue — while you still have time to fix them. Owners who wait until a buyer is at the table discover those gaps during due diligence, when every weakness becomes leverage to chip the price down. Know your real number first, then spend the runway closing the distance between where you are and where you want to be.
This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.
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