How to Value a Service Business: A Plain-English Guide

One of the most common questions we receive from business owners considering a sale is: 'What is my business actually worth?' It is a reasonable question, and the answer is more straightforward than most people expect.

Here is a plain-English guide to how service businesses are valued.

The Foundation: Seller's Discretionary Earnings (SDE)

For small service businesses, typically those with revenues under $5 million, the most commonly used valuation metric is Seller's Discretionary Earnings, or SDE.

SDE represents the total financial benefit that a working owner-operator receives from the business in a given year. It starts with net income and adds back:

• Owner's salary and benefits
• Owner's personal expenses run through the business (vehicle, phone, travel)
• Non-recurring or one-time expenses (equipment purchases, legal fees)
• Depreciation and amortization
• Interest expense

If your business generates $400,000 in net income, and you pay yourself a $150,000 salary and run another $25,000 in personal expenses through the business, your SDE is approximately $575,000.

How Buyers Apply a Multiple

Once SDE or EBITDA is established, buyers apply a multiple to arrive at a purchase price. The multiple depends on factors specific to your business and your industry. We do not publish a blanket multiple range because the right number depends on the quality factors below.

Factors that increase your multiple:

• Long operating history (10+ years) with consistent or growing revenue
• Recurring or contracted revenue rather than project-based work
• Diversified customer base: no single customer over 20% of revenue
• Trained, tenured management team that reduces key-person dependency
• Clean financial records going back at least three years
• Proprietary brand, territory, or licensing position

Factors that reduce your multiple:

• Heavy key-person dependency: the business cannot run without you
• Customer concentration: one customer is 30% or more of revenue
• Declining revenue trend in the past 1-2 years
• Deferred maintenance on equipment or facilities
• Messy or inconsistent financial records

When EBITDA Replaces SDE

For larger businesses with management depth beyond the owner, buyers typically shift from SDE to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). EBITDA is calculated using a market-rate salary for the owner's role, not on what the owner actually pays themselves, which standardizes comparisons across businesses. The same quality factors above continue to drive the multiple applied.

What This Means Practically

If you are three to five years from selling, understanding your current SDE and the factors that affect your multiple gives you a roadmap for increasing your business value before you go to market:

• Reduce key-person dependency: hire and train a manager
• Diversify your customer base if you have concentration risk
• Clean up your financial records and work with a good CPA
• Document your processes so the business can run without you
• Grow recurring revenue: contracts and subscriptions command premium multiples