Valuation
What a business is actually worth.
How Canadian businesses are valued — the earnings measures buyers use, what moves a multiple up or down, and why the number a lender will support is the one that matters.
Guides
- What is a farm business worth?A farm’s worth is the sum of three separately valued pieces — land valued against comparable farmland sales, equipment valued at appraised resale value rather than book value, and quota valued (where it applies) under the provincial marketing board’s own pricing rules — plus whatever the operating business earns above what the land and equipment alone would return.
- What is an AI business worth?An AI business is worth what its provable, owned assets can defensibly earn — recurring revenue from customers who aren’t easily replaced by a generic tool, built on data and IP the seller can prove it owns — and a thin wrapper around someone else’s API is priced well below a business built on proprietary data and a defensible model, even at similar revenue.
- What is an auto repair business worth?An auto repair business is worth what a buyer will pay for its normalized discretionary earnings, adjusted for equipment condition, lease security, licensing risk and how dependent the shop is on the current owner — not simply a multiple applied to revenue.
- What is an e-commerce business worth?An e-commerce business is worth what a buyer will pay for its normalized discretionary earnings, weighted by how recurring the revenue is and how exposed the store is to a single platform, supplier or the owner personally — not simply a multiple of sales.
- What is a healthcare practice worth?A healthcare practice is generally valued on its normalized earnings, adjusted for owner compensation and one-time items, then weighed against how much of its patient base and revenue depend on the current practitioner personally. No single multiple or formula applies to every practice.
- What is a software business worth?A software business is generally valued on the quality and predictability of its revenue, how fast it is growing, how much of that revenue it keeps after costs, and how concentrated it is among a small number of customers, more than on the size of revenue alone.
- What is a retail business worth?A retail business is typically valued off its seller discretionary earnings, with inventory priced and paid for separately at closing rather than folded into the headline number, and the resulting multiple moves with lease strength, sales trend, owner dependence and how replaceable the location and supplier terms are.
- What is a professional practice worth?A professional practice is typically valued off its recurring, normalized earnings, weighted heavily by how likely clients are to stay once the founder steps back, since the asset is the relationship and the fee base rather than equipment or inventory, and a low-retention or founder-dependent book is priced accordingly.
- What is a marketing agency worth?A marketing agency is generally valued on its normalized earnings, discounted for client concentration, the mix of retainer versus project revenue, and how dependent client relationships are on the founder rather than the wider team. No fixed multiple applies to every agency.
- What is a staffing agency worth?A staffing agency is valued on its normalized earnings and margin spread rather than headline placement revenue, then adjusted for how the payroll-funding facility is structured, client concentration, and compliance history with employment standards and workers’ compensation.
- What is an insurance brokerage worth?An insurance brokerage is valued primarily on its book of business — the recurring commission stream from its client relationships and carrier contracts — adjusted for client concentration, retention history and how much contingent or profit-sharing income is genuinely recurring.
- What is a distribution business worth?A distribution business is valued on its normalized earnings after separating out inventory, which is typically priced and settled on its own at closing rather than folded into a multiple, then adjusted for supplier-agreement risk, customer concentration and working capital intensity.
- What is a gym or fitness business worth?A gym or fitness business is typically valued off normalized earnings driven by active membership count, average retention and ancillary revenue such as personal training and retail, discounted for outstanding equipment lease obligations and how tied member relationships are to a specific instructor.
- What is a salon or spa worth?A salon or spa is typically valued off normalized earnings from services and retail combined, weighted heavily by whether stylists and technicians are employees whose clients transfer with the business or independent chair renters whose clients may not.
- What is a daycare business worth?A daycare business is typically valued off normalized earnings driven by enrolment relative to licensed capacity, the durability of any subsidy or funding agreements, and how tightly required staff-to-child ratios constrain the cost structure, rather than off revenue or waitlist length alone.
- What is a laundromat worth?A laundromat or dry-cleaning business is typically valued off normalized earnings after accounting for equipment age, utility costs and any environmental exposure from historical dry-cleaning solvent use, rather than off revenue alone, since two similar-looking stores can carry very different real operating costs.
- What is a cleaning business worth?A cleaning business is worth what a buyer will pay for its durable, recurring contract revenue after adjusting for client concentration, labour cost pressure and how dependent the accounts are on the current owner personally — not a fixed multiple applied to revenue.
- What is a landscaping business worth?A landscaping business is worth what a buyer will pay for its normalized earnings across a full seasonal cycle, adjusted for how much of that revenue is recurring maintenance versus one-off work, the fleet’s remaining useful life, and how much the operation depends on the owner or a key crew lead.
- What is a self-storage business worth?A self-storage business is typically valued closer to income-producing real estate than a small business, using net operating income capitalized at a market rate rather than a discretionary-earnings multiple, adjusted for occupancy, achievable rate growth, and the physical condition of the facility.
- What is a car wash worth?A car wash is worth what a buyer will pay for its normalized, weather-adjusted earnings, discounted for the tunnel and equipment’s remaining useful life and any unresolved environmental or discharge-permit issues, and increased where a stable, verifiable membership base makes the revenue more predictable.
- What is a brewery worth?A brewery is generally valued on a blend of its production and distribution earnings and, separately, the replacement cost and utilized capacity of its brewing and packaging equipment, adjusted for whether its liquor manufacturing licence and excise standing are current and in good order.
- What is a hotel or motel worth?A hotel or motel is generally valued through a blend of its real estate worth and its operating earnings, adjusted for brand affiliation, pending property improvement obligations, seasonality and how the property compares to others in its market.
- What is a gas station worth?A gas station is generally valued on a combination of fuel volume and margin, the strength and remaining term of its fuel-supply and branding agreement, the age and environmental standing of its storage tanks, and, separately, the value of the real estate if it is owned rather than leased.
- What is a dental practice worth?A dental practice is generally valued on normalized earnings drawn from its collections, weighted by how much production comes from the owner personally versus associates and hygiene, and by the condition of its equipment and lease — with no single multiple applying across every practice or buyer type.
- What is a veterinary practice worth?A veterinary practice is generally valued on normalized earnings per doctor, the size and loyalty of its active client base, how much revenue recurs through wellness plans rather than one-off visits, and the condition of its facility and equipment, more than on gross revenue alone.
- What is a pharmacy worth?A pharmacy is generally valued on normalized earnings driven mainly by its prescription volume, average script value and payer mix, adjusted for how much profit the front-store retail side contributes, with banner affiliation terms and location demand shaping the number further.
- What is an accounting practice worth?An accounting practice is generally valued as a multiple of annual recurring fees rather than a multiple of earnings, adjusted for how likely clients are to stay after the sale, how the fee base splits between recurring compliance work and advisory engagements, and how much the practice depends on a single owner.
- How to value a business in CanadaA business is valued in Canada by applying an earnings-based, asset-based or market-based method to its normalized financial results, with the choice of method, and the multiple or rate applied, driven by the business’s size, industry, ownership structure and risk profile.
- SDE vs EBITDA: which one applies to your businessSeller discretionary earnings applies to a business run day-to-day by its owner, since it adds the owner’s full compensation back to profit, while EBITDA applies once a business is professionally managed and pays market-rate compensation for the work the owner still does, because EBITDA only adds back interest, tax, depreciation and amortization.
- How buyers verify the earnings you reportBuyers verify reported earnings by reconciling your financial statements to your filed tax returns and sales-tax filings, cross-checking bank deposits and supplier records against reported revenue, requiring documentation for every add-back, and, on larger deals, commissioning an independent quality-of-earnings review before closing.
- What drives a higher multiple on a business saleA higher multiple reflects lower perceived risk to future earnings: businesses that run without heavy owner involvement, hold a diversified customer base, show consistent or growing earnings, and operate on documented systems consistently price at a stronger multiple than similar-revenue businesses that depend entirely on one person.
- How to read a business valuation reportA business valuation report should be read for three things above the final number: which method was used and why, what assumptions and normalizations were made to the financial statements, and whether the reasoning would hold up if a skeptical outsider — a buyer, a lender or the CRA — read it line by line.
- Valuing a business that owns its premisesA business that owns its own real estate is valued by separating the two components — the operating business, valued off normalized earnings after adjusting for a fair market rent, and the real estate itself, valued by a property appraisal — because combining them into one multiple misprices both.
- What is a trades business worth?A trades business is generally valued as a multiple of seller’s discretionary earnings, adjusted for how dependent it is on the owner, how much revenue is contracted or recurring, and the condition of its vehicles, equipment and licensing.
- What is a restaurant worth?A restaurant is generally valued as a multiple of seller’s discretionary earnings, adjusted for the strength of the lease, whether the liquor and food licensing is transferable, kitchen equipment condition, and how dependent it is on the owner.
- What is a trucking business worth?A trucking business is generally valued on a multiple of its normalized earnings, usually seller’s discretionary earnings for an owner-operated carrier, adjusted for fleet condition, freight-contract quality and safety record. Two carriers with similar revenue can be worth very different amounts once those adjustments are made.
- What is a manufacturing business worth?A manufacturing business is generally valued on a multiple of its normalized earnings, with the equipment, inventory and work-in-progress checked separately to confirm the balance sheet actually supports that earnings figure. A plant with strong reported profit but aging, undermaintained equipment is typically worth less than the income statement alone suggests.
Expert answers
- How do I know what my business is worth?Business value generally starts from normalized earnings — SDE for owner-operated businesses, EBITDA for larger ones — multiplied by a sector-appropriate figure. What moves that multiple is risk: how much of the business depends on the current owner, how concentrated the customers are, and how predictable next year’s revenue is.
- How does remaining term affect a franchise resale price?The less time remains on a franchise agreement, and the less certain renewal is, the less a buyer can justify paying — the purchase buys a stream of future income that stops when the agreement ends. A location with years left and a clear, affordable renewal right supports a materially higher price than an identical location with a short term and a renewal the franchisor can decline or reprice.
- Is a franchise worth more than an independent business?Neither is inherently worth more. A franchise typically produces lower discretionary earnings, because royalties come off the top every year, but buyers and lenders sometimes accept a narrower risk premium for a proven system and a recognizable brand. Which effect dominates depends on the specific system and location, and how much of its success comes from the brand rather than the operator.
- How is a multi-unit franchise business managed and valued?A multi-unit franchise business is generally managed through a layer of location or area managers, since one owner cannot personally run several locations’ operations. Buyers and lenders tend to value that structure differently than a single owner-operated location, because a business already running on documented systems and delegated management is less dependent on any one person, including its owner.
- How much is my HVAC business worth?An HVAC business is generally valued as a multiple of seller’s discretionary earnings, but the size of that multiple depends heavily on how much revenue comes from signed maintenance contracts rather than one-off installs, and on how portable the gas and refrigeration licensing actually is.
- How much is my restaurant worth?A restaurant is generally valued as a multiple of seller’s discretionary earnings, the same starting point used across small business valuation, but because restaurant margins run thin, small swings in food cost and labour cost move that earnings figure far more than an equivalent swing in revenue does.
- How much is my convenience store worth?A convenience store is generally valued off seller’s discretionary earnings like any other retail business, but the mix between low-margin, high-volume categories such as fuel, lottery and tobacco and higher-margin merchandise, along with whether the store operates under a recognized banner, moves the multiple more than in most other retail formats.
- How is retail inventory valued at closing?Retail inventory at closing is first sorted into what the store actually owns outright versus stock held on consignment or supplier-owned display units that are not the seller’s to sell, and only the owned stock is then counted and priced, typically at cost, with the total settled as an adjustment to the purchase price rather than folded into it.
- How much is my dental practice worth?A dental practice is generally valued on normalized earnings adjusted for how much of the practice’s production comes from the owner personally versus associates and the hygiene department, and increasingly on which kind of buyer is looking, since a solo dentist buyer and a consolidating group weigh the same numbers differently.
- What multiple does a SaaS business sell for?A SaaS business is commonly discussed in terms of a multiple applied to annual recurring revenue rather than earnings, and where that multiple lands within any illustrative range moves heavily with growth rate, net revenue retention and gross margin — not with revenue size alone.
- How is a fleet valued in a trucking sale?A fleet is generally valued at its appraised fair market value from an independent equipment appraiser, not its depreciated book value or its original purchase price, and where units are still financed or leased, only the equity above the outstanding payout actually adds to the purchase price.
- How much is an auto repair shop worth?An auto repair shop is generally valued as a multiple of seller’s discretionary earnings like most small businesses, but its labour-to-parts revenue mix, the site’s environmental history, and whether it operates under a franchise banner or independently each move that multiple in ways that are specific to this industry.
- What is the difference between price and enterprise value?The headline price a buyer and seller agree is usually built from enterprise value, what the operating business itself is worth independent of how it happens to be financed, and then adjusted for the target’s actual debt, cash and working capital position at closing to arrive at the equity value, which is the number that determines what actually changes hands.
- How does the industry intelligence panel work?Every listing on Deavo carries an industry intelligence panel showing typical margins, growth trends and a conservative estimated value range, built from aggregated public economic data for that industry, not from the specific business’s own financials. It exists to give a buyer general context about the sector, and it is never an appraisal or a claim about the individual business.
- What is the estimated value range on a listing?The estimated value range shown on a Deavo listing is a broad, conservative spread built from public benchmark data for that industry, meant to give a buyer or seller a general sense of scale. It is not an appraisal, a valuation, or any opinion about what that specific business is actually worth, and it should never be treated as one.
- Should I keep the real estate when I sell the business?Keeping the real estate and leasing it to the buyer gives you ongoing rental income and keeps a valuable asset, but ties you to the buyer as a landlord and can make the deal harder to finance; selling the property with the business simplifies the transaction and often produces a cleaner exit, and which suits you depends on your income needs and how much ongoing involvement you want.
- What if the owner basically is the business?Buying a business where the owner personally holds every key relationship means you are really buying a transition project, not a turnkey operation, and the deal needs to be structured around that reality — commonly through a defined training and handover period, an earn-out or holdback tied to post-closing performance, and a genuine non-compete. Price alone does not solve this kind of risk.
- What if the business has been losing customers?A customer count that has been declining does not automatically mean the earnings are unreliable, but it changes how those earnings should be read — separate the cause into something structural, competitive, or specific to the current owner, because each points to a different effect on value and a different question worth asking before you rely on any multiple.
- How do I value a business with messy books?Disorganized financial records make a business harder to value with confidence, not impossible to value at all — start by reconstructing a reliable revenue and expense picture from independent sources like bank statements and tax filings, then treat the resulting uncertainty as a genuine discount rather than pretending the numbers are more precise than the records actually support.
- What multiple do small businesses sell for in Canada?Small Canadian businesses are typically priced as a multiple of seller’s discretionary earnings, and that multiple moves with risk, size, growth, and owner dependence rather than following one fixed industry rule of thumb.
- Why is my business worth less than I expected?A gap between what an owner expects and what buyers or lenders will actually pay almost always traces back to owner dependence, messy or unverifiable financials, customer concentration, or a declining earnings trend, not to the buyer undervaluing the business.
- Do I need a professional business valuation?A formal valuation is worth the cost whenever a number will be relied on for a sale price, financing, litigation, a shareholder buyout, or an estate, situations where a defensible, documented opinion matters more than a quick estimate.
- What is my business worth without me in it?A business that cannot run without its owner is worth meaningfully less than an identical business with a manager or team in place, because a buyer is effectively pricing the risk that revenue, customers, or operations falter the moment ownership changes hands.
- How is inventory valued in a business sale?Inventory is normally valued separately from goodwill in a business sale, priced at a defined standard such as cost or net realizable value, counted at or near closing, and settled through a purchase price adjustment rather than folded into the multiple applied to earnings.
- How do I value a service business?A service business is valued almost entirely on the durability of its earnings and client relationships rather than on hard assets, so the multiple applied to its adjusted earnings depends heavily on how much of the work is contracted or recurring versus tied to the owner personally.
- How do I value a business that owns its real estate?Real estate owned by a business is normally valued separately from the operating business itself, using a real property appraisal rather than an earnings multiple, and the two values are then added or structured together depending on whether the buyer wants the building as part of the deal.
Comparisons
- Accountant vs business valuatorAn accountant prepares and reviews a business’s financial statements and tax filings and can offer an informal read on value, while a Chartered Business Valuator is credentialed specifically to produce a defensible, evidence-based valuation report using recognized methodology — a materially different scope and level of rigour.
- Business valuation vs real estate appraisalA business valuation values the operating business — its earnings power, customer relationships and goodwill — as a going concern, typically prepared by a credentialed business valuator, while a real estate appraisal values only the land and building, prepared by an accredited property appraiser using entirely different methods and evidence.
- Working capital peg vs cash-free debt-freeA cash-free, debt-free structure is the market convention that the seller keeps the cash on the balance sheet and clears the debt before closing, while a working capital peg is a separately negotiated target for the operating assets — receivables, inventory and payables — that has to remain in the business, and the first does not automatically protect a buyer against the second being stripped down before closing.
- SDE vs EBITDASeller’s discretionary earnings adds back the owner’s full compensation on the assumption that a new owner-operator will run the business personally, while EBITDA assumes the business already pays market-rate management and adds back only interest, tax, depreciation and amortization. The two measures describe different sizes of business and are not interchangeable without adjustment.
- Leasing vs owning your premises, when you sellIf you lease your premises, only the business itself is for sale and the lease has to be assigned or renewed for the buyer to take over, while if you own the real estate, you can bundle the property into the sale, sell it separately, or lease it back to the buyer — each option changes the price, the financing and who the buyer has to satisfy to close.
- A multiple-based estimate vs a formal appraisalA multiple-based estimate applies a general industry range to a business’s earnings and can be produced quickly and at low cost, while a formal appraisal is a credentialed, evidence-based report built specifically for that business — the two serve different purposes, and a quick multiple is not a substitute for an appraisal when real money, tax or a dispute depends on the number.
Definitions
- Seller’s marketA seller’s market exists when demand from qualified buyers exceeds the supply of good-quality businesses for sale, giving sellers more leverage — stronger prices, fewer contingencies, and often several buyers competing for the same opportunity. A buyer’s market is the reverse: more listings than qualified demand, favouring buyer leverage instead.
- Associate buy-inAn associate buy-in is when a professional already working in a practice — a dentist, doctor, veterinarian or lawyer, for example — purchases an equity stake in it rather than the practice being sold outright to an outside buyer. The price is usually set by a formula tied to collections or earnings and often paid in over time.
- Work in progress (WIP)Work in progress, or WIP, is the value of services or products a business has started but not yet billed to the client at the time of a sale. Because it sits between completed inventory and recognized revenue, buyers and sellers usually negotiate separately how WIP is valued and who is entitled to collect on it after closing.
- Supply management quotaSupply management quota is the production right — most commonly for dairy, poultry or eggs — that lets a Canadian farm produce and sell a regulated volume under the national supply management system. Quota is administered and traded through provincial marketing boards, generally carries its own transfer rules and value, and often makes up a large share of a farm business’s worth.
- Equipment appraisalAn equipment appraisal is an independent professional’s estimate of what a business’s machinery and equipment is actually worth, typically expressed as fair market value and orderly liquidation value. Buyers, sellers and lenders use it to support purchase price allocation, financing decisions and insurance coverage rather than relying on the seller’s book value or a rough estimate.
- SeasonalitySeasonality is the predictable rise and fall in a business’s revenue, cash flow or staffing needs tied to the time of year — landscaping in summer, retail in December, tourism in peak months. A buyer needs numbers across a full cycle, not a snapshot, or a strong season gets mistaken for the business’s normal run rate.
- Bad debtBad debt is money a customer owes that the business concludes it will never collect, and either writes off or sets aside a reserve for. How consistently a seller has recognized bad debt over time — rather than leaving stale receivables sitting on the books uncollected and unwritten-off — is a direct test of how reliable the rest of the financial statements are.
- Capital expenditure (capex)Capital expenditure, or capex, is money spent on assets expected to provide value for more than a year — equipment, vehicles, leasehold improvements, a building — as opposed to day-to-day operating costs. Buyers split it further into maintenance capex, which just keeps the business running as-is, and growth capex, which expands it.
- Leasehold improvementsLeasehold improvements are permanent alterations made to leased premises — a commercial kitchen, a build-out, flooring, electrical or plumbing work. They are frequently a large part of what a buyer is paying for, and under most leases they become the landlord’s property at the end of the term.
- Revenue multipleA revenue multiple estimates a business’s value by multiplying its annual revenue by a factor drawn from comparable deals, rather than multiplying a profit measure like EBITDA or SDE. It suits fast-growing or thin-margin businesses — software, subscription, or e-commerce — where revenue is a more stable signal than current profit, but it ignores cost structure entirely.
- Discounted cash flow (DCF)Discounted cash flow (DCF) is a valuation method that projects a business’s future free cash flows over several years, then discounts each year’s projection back to today’s dollars using a rate that reflects risk and the time value of money. The result is a present value built entirely on assumptions about future performance.
- Asset-based valuationAsset-based valuation values a business as the sum of its individual assets — equipment, inventory, receivables, real estate, and intangibles — minus its liabilities, rather than as a multiple of earnings. It’s the standard reference point for asset-heavy or capital-intensive businesses and for companies with weak or inconsistent profitability.
- Normalization (normalized earnings)Normalization is the process of adjusting a business’s reported financial statements to remove items that don’t reflect how the business will actually perform going forward — one-time events, the owner’s personal expenses, or above- or below-market compensation. The result is normalized, or adjusted, earnings that buyers can compare across businesses on a like-for-like basis.
- Comparable transactionsComparable transactions — often called ’comps’ — are recent sales of similar businesses, used as a reference point when pricing a business for sale. Analysts look at deals in the same industry, of similar size, and in a similar geography, then compare the multiples those deals sold at to gauge where a current listing might land.
- Rule-of-thumb valuationA rule-of-thumb valuation applies a simple, widely used formula for a given industry — commonly a multiple of annual revenue, SDE, or a per-unit metric like price per seat or price per customer — to arrive at a quick, rough estimate of value. It’s a fast starting point for a conversation, not a substitute for a full valuation.
- Enterprise valueEnterprise value is the value of a business’s core operations, independent of how that business happens to be financed. It represents what it would cost to acquire the whole operating entity — commonly calculated as equity value plus debt, minus cash — and is the figure most often used when comparing businesses or applying an earnings multiple.
- Equity valueEquity value is the value of a business’s ownership stake — what shareholders actually own after debt is paid off. It’s calculated by starting from enterprise value, subtracting outstanding debt, and adding back cash on the balance sheet, which is why two businesses with the same operations can have very different equity values.
- Net working capitalNet working capital is a business’s current assets — cash, receivables, inventory — minus its current liabilities, such as payables and short-term debt. It measures the short-term operating cushion a business needs to keep running: paying suppliers, covering payroll, and carrying inventory or unpaid customer invoices before that cash comes back in.
- EBITDA marginEBITDA margin is EBITDA divided by revenue, expressed as a percentage. It shows how much of every dollar of sales converts into operating profit before financing costs, taxes, depreciation, and amortization are taken into account, which makes it a quick way to compare operating efficiency across businesses of very different sizes.
- Gross marginGross margin is revenue minus the direct cost of goods or services sold, expressed as a percentage of revenue. It measures how much a business keeps from each sale before covering overhead like rent, marketing, and administrative salaries, and it’s usually the first place a buyer looks to judge the health of the core pricing model.
- Recurring revenueRecurring revenue is income a business can reasonably expect to receive again from existing customers, without needing to win a brand-new sale each time — subscriptions, maintenance contracts, retainers, or repeat service agreements are common examples. Buyers generally value recurring revenue more highly than one-off sales because it’s more predictable.
- Customer churnCustomer churn is the rate at which existing customers stop doing business with a company over a given period — cancelling a subscription, not renewing a contract, or simply not coming back. It’s usually expressed as a percentage of customers, or of revenue, lost per month or per year, and low churn generally signals durable revenue.
- ARR and MRRARR (annual recurring revenue) and MRR (monthly recurring revenue) measure the predictable, subscription-style revenue a business can count on over the next year or month, based on active subscriptions and contracts at a point in time. They exclude one-time sales, and MRR is simply ARR divided by twelve, or vice versa.
- Revenue backlogRevenue backlog is the dollar value of confirmed orders or signed contracts that a business has not yet delivered or billed — work that’s committed but still ahead of it. It’s common in project-based businesses like construction, manufacturing, and professional services, where revenue is recognized only as the work is actually completed.
- Book of businessA book of business is the complete set of client relationships, accounts, and recurring engagements a company or individual professional has built up over time. In service industries — insurance brokerages, financial advisory, accounting, and similar fields — the book of business is often the single most valuable asset changing hands in a sale.
- Valuation gapA valuation gap is the difference between the price a seller expects for their business and the price buyers in the market are actually willing to pay. It’s one of the most common reasons a listing sits unsold, and it usually narrows only once one or both sides adjust their expectations based on real market feedback.
- Quality of earnings (QoE)Quality of earnings, or QoE, is an independent financial review that tests how accurate and sustainable a business’s reported earnings actually are, beyond what the financial statements show on their face. It checks whether reported profit is real, recurring, and properly supported — a step buyers commonly take before finalizing a deal, usually after signing a letter of intent.
- Seller’s discretionary earnings (SDE)Seller’s discretionary earnings (SDE) is the total annual cash benefit a single owner-operator receives from a business, before financing and before their own compensation. It starts at net profit and adds back the owner’s salary, personal and one-time expenses, interest, depreciation and amortization.
- EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization — a measure of operating profit that strips out financing and accounting choices so two businesses can be compared directly. Unlike SDE, it does not add back an owner’s salary, because it assumes the business pays a market wage for management.
- Add-backsAdd-backs are expenses added back to a business’s reported profit because they are personal, one-time, or specific to the current owner and will not continue after the sale. They are how reported net profit becomes SDE or adjusted EBITDA, and they are the single most contested part of a valuation.
- Asking multipleAn asking multiple is the asking price expressed as a multiple of annual earnings — usually SDE for owner-operated businesses and EBITDA for larger ones. A business listed at $900,000 with $300,000 in SDE carries an asking multiple of 3.0×.
- Owner dependenceOwner dependence is the degree to which a business’s revenue, relationships or day-to-day operation rely on the current owner personally. The more a business depends on one person, the less of it actually transfers to a buyer — which is why heavily owner-dependent businesses sell at lower multiples, and sometimes do not sell at all.
- Customer concentrationCustomer concentration is the share of revenue that comes from a small number of customers. It matters because losing one account can erase a disproportionate share of earnings, so buyers and lenders discount concentrated revenue even when the business is profitable and growing.
- GoodwillGoodwill is the portion of a purchase price that exceeds the value of a business’s identifiable assets — its reputation, customer relationships, brand, trained staff and earning capacity. In an asset sale it is a separate line in the purchase price allocation, and it has its own tax treatment.
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