Business valuation for acquisition purposes uses different methods depending on the size and type of business. Here are the three most common approaches:
1. SDE Multiple Method (most common for small businesses) SDE = Net Income + Owner's Salary + Owner's Benefits + Depreciation + One-time Expenses. Multiply SDE by an industry-specific multiple (2–4x for most service businesses, up to 6x for high-recurring-revenue businesses). This is the standard for owner-operated businesses under $5M revenue.
2. EBITDA Multiple Method (for larger businesses) EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. Unlike SDE, EBITDA does not add back the owner's salary — it assumes the business will be run by a salaried manager. EBITDA multiples range from 3–7x for most industries. This method is standard for businesses above $5M revenue or those being sold to institutional buyers.
3. Revenue Multiple Method (for high-growth or SaaS businesses) Some industries trade on revenue multiples, particularly SaaS (2–8x ARR), insurance agencies (1.5–3x revenue), and accounting firms (1–1.5x revenue). This method is most useful when earnings are low but growth is high.
Factors that increase valuation multiples: - High recurring revenue (monthly contracts, subscriptions) - Low owner dependency (manager-run operations) - Revenue growth (10%+ annually) - Low customer concentration (no single customer >15% of revenue) - Strong competitive moats (licenses, patents, brand) - Clean financials (2+ years of CPA-reviewed books)
Factors that decrease valuation multiples: - Owner-dependent operations - Declining revenue - High customer concentration - Thin margins - Deferred maintenance or capex - Regulatory risk