Is Your Business Actually Valuable?
Most owners value their business using a number they've never tested — usually a multiple of revenue. This piece breaks down the difference between revenue and normalized earnings, when SDE applies versus EBITDA, and why the real test of a valuation is whether it survives a buyer's own analysis.
Most owners answer this question with a number they've never tested — usually a multiple of revenue, or a figure they heard someone else's business sold for. Both are almost always wrong, and both cost real money the moment a buyer or investor starts asking questions.
The number that actually matters isn't revenue — it's normalized earnings
Buyers don't pay for revenue. They pay for what the business generates after costs, adjusted to reflect what a new owner would actually receive. A business with $4M in revenue and $150,000 in real earnings is not a $4M business — depending on the multiple, it may be worth closer to $450,000. Confusing the two is the single most expensive mistake an owner makes before going to market.
Which multiple applies depends on whether the business needs you
SDE (Seller's Discretionary Earnings) applies when the owner is the business — managing daily operations, holding key client relationships, making every decision. Most owner-operator businesses trade at 2x to 4.5x SDE. EBITDA applies once the business runs with real management beneath the owner — when a buyer is purchasing a system, not a job. Applying an EBITDA-style multiple to an SDE-style business, or the reverse, routinely misprices a company by 30 to 50 percent.
"Adjusted" earnings need to survive scrutiny, not just impress you
It's standard practice to add back one-time or personal expenses to show a business's true earning power. But industry data shows a majority of seller-prepared adjustments overstate earnings by significant margins — and every one gets tested during buyer diligence. An add-back that doesn't survive that test doesn't just get removed; it damages trust in every other number in the document.
The multiple reflects risk, not effort
Two businesses with identical earnings can be worth meaningfully different amounts based on factors that have nothing to do with how hard the owner worked: customer concentration, dependence on the owner personally, whether revenue is contracted or one-off, and how defensible the business's position is. A business that would collapse without its founder is worth less than one that wouldn't.
The real test: would this number survive a buyer's own analysis?
A valuation is useful because it holds up when a real buyer, with their own advisors, starts checking the assumptions behind it. If the earnings base isn't normalized correctly, if the add-backs can't be defended, or if the multiple was chosen because it sounded right rather than because it matched the business's actual risk profile, the number won't survive contact with a serious offer.
A business that would collapse without its founder is worth less than one that wouldn't — regardless of what either currently earns.
- Revenue is not the number buyers pay for — normalized earnings is
- SDE applies to owner-operator businesses (2x–4.5x); EBITDA applies once real management exists beneath the owner
- Using the wrong multiple type routinely misprices a business by 30–50%
- Add-backs must survive buyer diligence, not just look good on paper
- The multiple reflects risk — customer concentration, owner dependency, revenue quality — not effort
Atefe Hosseini
Author, CARAVAN
Contributor to CARAVAN, QAA's market intelligence publication.