How to Value a Business: The Broker's Complete Guide
Start with the earnings story
Every credible valuation starts with one question: what does this business actually earn? For Main Street businesses, that number is SDE — Seller Discretionary Earnings. SDE = net profit plus owner compensation, interest, taxes, depreciation, amortization, and legitimate discretionary add-backs. It answers the buyer's real question: "what would this business put in my pocket if I ran it?"
SDE vs EBITDA: know your lane
SDE is the Main Street benchmark because the owner IS the business — the buyer will replace them and keep the earnings. EBITDA is the lower-middle-market benchmark, used when a management team runs the business and the buyer is an investor, not an operator. Mixing them up is the fastest way to overvalue a business by 2x.
Multiples: the market's judgment
Value = earnings × multiple. Main Street businesses typically trade at 2–3.5x SDE. Mid-market firms trade at 4–6x EBITDA. The multiple reflects quality of earnings: recurring revenue, customer diversification, growth trajectory, and how replaceable the owner is.
Triangulate three methods
Serious brokers never rely on a single method. They triangulate: (1) multiple of earnings, (2) asset-based value, and (3) comparable sales. Where all three overlap is your defensible value range.
The lender is the final judge
If the buyer needs an SBA loan, the lender re-underwrites everything — including your recast. A valuation that can't survive a lender's scrutiny isn't a valuation, it's a wish.
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