Quick answer
Small businesses are valued on seller's discretionary earnings (SDE) times an industry multiple. A services business earning $210,000 of SDE at a 2.5×–3.5× multiple is worth $525,000 to $735,000 on the market method, while a discounted cash flow on the same earnings produces about $1.5 million — and understanding why those two numbers differ is most of what valuation is.
How the Business Valuation Calculator works, step by step
Start with SDE: net profit plus the owner's salary, benefits, and personal or one-off expenses run through the business — the total economic benefit of owning it. Buyers price that number, not revenue. Enter revenue anyway: the SDE margin (SDE divided by revenue) is the first sanity check, and a margin far outside the industry norm means the SDE needs explaining before a multiple is applied.
The market method multiplies SDE by a range drawn from what similar businesses actually sell for — the calculator presets seven industries. The anchor is real: BizBuySell's Q2 2026 Insight Report put the average closed-sale multiple at 2.7× SDE, and IBBA's Market Pulse shows multiples rising with deal size, from 2.0× under $500,000 to 3.1× between $1 million and $2 million. Owner-dependent businesses trade low because the buyer is purchasing a job with risk attached.
The income method projects SDE forward at your growth rate, discounts each year back, and adds a terminal value for everything after the projection. Nearly half the DCF value in the example below — 48% — sits in that terminal value, which is why the discount rate matters more than any single year's projection. At 25% instead of 20%, the same business's DCF falls from about $1.5 million to about $1.15 million.
The DCF runs higher because it treats all of SDE as cash a buyer receives — but a buyer who must replace the owner starts by subtracting a manager's salary, which is much of why market prices sit below DCF values. Treat the DCF as the ceiling for a perfect handover, the multiple range as the price discovery zone. A factor-of-two gap means the market thinks the earnings are less transferable than the spreadsheet assumes.
Use the tool to test the levers. The industry presets show the spread: SaaS at 3.5×–5.5× against retail at 1.5×–2.5× is the market pricing recurring revenue and owner-independence. Then ask what would move your business up its own range: documented systems, a second-in-command, recurring contracts, no client above about 10% of sales. That work raises the multiple itself — the only valuation improvement that survives contact with a real buyer.
The formula
Market value = SDE × multiple. DCF value = Σ SDE × (1 + g)^t ÷ (1 + d)^t for t = 1..n, plus terminal value = final-year SDE × (1 + terminal g) ÷ (d − terminal g), discounted back n years. SDE margin = SDE ÷ revenue.
Worked example — try it on the calculator above
Worked example: services firm, $850,000 revenue, $210,000 SDE
A professional-services firm turns over $850,000 and produces $210,000 of SDE — a 24.7% margin. At 2.5× to 3.5×, the market value is $525,000 to $735,000, midpoint $630,000 (an implied 0.74× revenue). The DCF, projecting SDE growing at 8% for five years, discounted at 20% with 2.5% terminal growth, sums to about $1,500,000 — more than double the market midpoint. Year-five earnings reach $308,559; the terminal value of $1,807,274 is worth $726,303 today. The gap is the lesson: the DCF assumes every dollar of SDE transfers to a buyer, and the market knows it does not. If you are selling, the work that closes the gap — systems, a second-in-command, recurring contracts — raises the multiple itself.
Frequently Asked Questions
What is the difference between SDE and EBITDA?
SDE is for owner-operated businesses: it adds back the owner's full compensation and perks, because the buyer will work in the business. EBITDA does not add back a market-rate salary for the role — it suits larger businesses (typically $1M+ of earnings) where management is replaceable staff. Using SDE multiples on an EBITDA business, or the reverse, is the most common valuation error in small deals.
What moves a business to the top of its multiple range?
Transferability. Recurring or contracted revenue, a customer base where no client is more than about 10% of sales, documented processes, staff who stay, and books that survive diligence. Each removes a reason for the buyer to discount. Growth helps too, but buyers pay for durable earnings, not last year's spike.
What discount rate should I use in the DCF?
For a small private business, 18–25% is the honest zone — far above public-market rates, because the investment is illiquid, concentrated and owner-dependent. If a valuation only works at a 10% discount rate, it does not work; it has been reverse-engineered. The calculator defaults to 20%, and the example's DCF falls from about $1.5 million to about $1.15 million at 25%, so stress-testing there is a useful habit.
Is the DCF or the multiple right?
For pricing an actual transaction, the market method is right almost by definition: businesses sell at multiples of earnings, and comparable sales are the evidence. The DCF earns its place as a check — if the market price implies cash flows you cannot defend in the DCF either, walk away; for a seller, the DCF shows which improvements would justify the top of the range.
Estimates, not advice. This calculator provides educational estimates based on the inputs you enter and the assumptions shown on this page. It is not financial, tax or investment advice, and it cannot see your full situation. Verify important figures against official sources, and consider a qualified professional for decisions about your own money. See our Disclaimer and Methodology.