Begin with your business's pre-tax net profit from your income statement.
Add all salary, wages, and benefits paid to the owner(s).
Include depreciation, amortization, and other non-cash expenses.
Include interest paid on business loans or financing.
Include any non-recurring costs like legal settlements or unusual repairs.
Include any personal expenses run through the business (car payments, travel, insurance, etc.).
Include any expenses paid above market rate that a new owner could reduce.
Some industries command higher multiples due to stability or growth potential
Larger businesses with higher SDE often receive higher multiples
Businesses showing consistent growth typically earn higher multiples
Less owner-dependent businesses usually receive higher multiples
Diverse customer bases typically command higher multiples
Higher percentages of recurring revenue lead to higher multiples
Qualifying add-backs typically include owner's salary and benefits, personal expenses run through the business (vehicles, travel, insurance, etc.), non-cash expenses (depreciation, amortization), one-time or non-recurring expenses, above-market expenses that a new owner could reduce, and interest expenses. The key test is whether these expenses would continue under new ownership.
Ideally, you should calculate SDE using the last three years of financial data, with greater weight given to more recent years. This provides a more accurate picture of the business's earning potential by accounting for trends and normalizing unusual fluctuations. Our calculator allows for three-year weighted average calculations.
Industry multiples vary widely based on factors like business size, growth rate, owner involvement, customer concentration, recurring revenue, and market conditions. Our calculator provides industry-specific multiple ranges as a starting point. For more precise valuation, consider consulting industry reports, business brokers, or valuation professionals familiar with your specific market.
Family member salaries should be adjusted to market rates rather than added back entirely. If a family member performs necessary work but is paid above market rate, you should add back only the portion above what you would pay a non-family employee for the same role. If the position is unnecessary, the entire salary can be added back.
