“Business Valuation: Forget Guesswork, Find Out How.”

The Problem with Business Valuations

Over the years, I’ve sat across the table from dozens of business owners who all shared the same belief: their business was worth far more than anyone else thought. And I get it. When you’ve poured years, sometimes decades, of sweat, long hours, and personal sacrifice into building something, it’s only natural to attach a high price tag to it. 

But here’s the harsh truth: most business owners don’t actually know how to value their business.

I remember one client who insisted his company was worth £2 million. When I asked how he’d arrived at that figure, his answer was, “That’s what I need to retire.” Another told me he based his valuation on what his competitor down the road was asking for their business, not what they actually sold it for. 

And then there was the owner who added up his mortgage, car loans, and what he wanted for his pension pot, and simply declared, “That’s the price.” None of these approaches stands up in the real world of buyers, banks, and investors.

The problem gets worse when business brokers get involved. Now, don’t get me wrong, there are some great brokers out there. But the reality is that most make the bulk of their money not from selling businesses, but from securing listings. And how do you secure a listing? By telling the owner what they want to hear: “Yes, your business is easily worth £1.5 million.” 

Brokers know that once they’ve got you signed up, they can worry about adjusting expectations later. Unfortunately, this often leads to disappointment, wasted time, and businesses that never actually sell.

If you want a real-world, grounded view of what your business is worth, not a fantasy valuation, then you need to understand Seller’s Discretionary Earnings (SDE). It’s not glamorous, it’s not inflated, but it is the single most practical tool for valuing owner-operated businesses.

What Is Seller’s Discretionary Earnings (SDE)?

When I first started learning about business valuations, I came across a phrase that completely changed how I looked at the numbers: Seller’s Discretionary Earnings, or SDE for short. At first, it sounded like another piece of financial jargon, but once I dug in, I realised it was actually the clearest and simplest way to show what a small business is really worth to a potential buyer.

Here’s how I explain it when I’m sitting down with a business owner: imagine you’re running your company and you want to show someone exactly how much financial benefit they’ll get if they step into your shoes. It’s not just about the profit figure at the bottom of your accounts. 

That’s usually depressed by tax planning, discretionary spending, and one-off costs. What buyers really want to know is, “If I buy your business and run it day to day, how much money will it put in my pocket?” That’s SDE.

The calculation is straightforward. You start with your net profit, then add back your salary as the owner. Next, you adjust for discretionary expenses, the things you put through the business that aren’t essential to running it, like your car lease, phone bill, or that “marketing expense” which was really a family holiday. 

You also add back any one-time or non-recurring costs (for example, moving premises) and non-cash items like depreciation. What you’re left with is the true earning power of the business for a single owner-operator.

The beauty of SDE is that it cuts through the noise. It doesn’t matter what clever accounting strategies you’ve used or how you’ve structured things for tax purposes.

SDE shows the clean, honest picture: this is what the business generates for the person running it. And that’s exactly the number serious buyers, lenders, and valuers are looking for.

Why SDE Is a Powerful Tool for Business Owners.

One of the biggest frustrations I see when talking to business owners about valuations is how disconnected their expectations are from the reality of the marketplace. I’ve had conversations where an owner tells me their business is “worth millions” because they’ve worked hard for years, or because they believe it has “potential.”

The problem is, buyers don’t pay for hard work or potential. They pay for earnings. And that’s why Seller’s Discretionary Earnings (SDE) is such a powerful tool; it cuts through emotion and opinion and gives you a figure you can actually use.

When you know your SDE, you can start to see your business the way a buyer would. Buyers want to know one thing: if they step into your role tomorrow, what’s the financial return they can expect for their time and investment? 

SDE answers that question directly. It gives them confidence that they’re not just buying a set of accounts, they’re buying a proven stream of earnings.

For you as an owner, the power of SDE is twofold. First, it gives you a reality check. Instead of guessing or hoping, you’ve got a tangible number to base your valuation on. Second, it gives you a roadmap to increasing value. 

Once you understand how SDE is calculated, you can make smart decisions that directly impact it, like cleaning up your books, reducing unnecessary personal expenses running through the business, or tackling those one-off costs before you put your business on the market.

I’ve seen business owners increase their valuation significantly simply by presenting a clear, defensible SDE figure. Lenders trust it. Buyers expect it. And once you understand it, you’ll never look at your business accounts the same way again. SDE isn’t just about valuation; it’s about giving you control over how your business is perceived and ultimately sold.

How the SDE Method Works in Practice.

Let’s get down to brass tacks. Seller’s Discretionary Earnings (SDE) is only the first part of the valuation equation. Once you’ve calculated SDE, the next step is to apply a multiple to it. This multiple is what transforms your earnings figure into a valuation.

Now, here’s the critical point: not all multiples are created equal.

1. Industry Multiple.

Every industry has its own “rule of thumb” multiple range. For example, a traditional restaurant or retail store might typically attract a 2–3x multiple, while a SaaS (software-as-a-service) company with recurring revenue could command anywhere from 5–8x, sometimes even higher. 

Why the difference? Because buyers value consistency, scalability, and lower risk, and industries that deliver those factors tend to get higher multiples.

This is where it’s so important to benchmark yourself correctly. I’ve seen owners of small service firms convinced they’ll achieve a “tech-style” multiple, only to be disappointed when buyers apply a much lower industry-standard figure.

2. Owner-Dependency Adjustment.

The second big factor is what I call the “remoteness” adjustment. In plain English: how much does the business rely on you personally? If you are the chief rainmaker, the person clients insist on dealing with, or the one holding all the operational knowledge in your head, then the business is far riskier for a buyer. Risk equals lower multiples.

On the other hand, if you’ve built systems, processes, and a management team that allow the business to run smoothly without you, buyers will pay more because they’re buying a transferable asset, not just your personal effort.

Example Calculation.

Let’s imagine a small marketing agency with an SDE of £200,000. Industry multiples for agencies typically sit in the 2–3x range. On paper, that would give a valuation of £400,000–£600,000.

But here’s where the owner-dependency factor kicks in. If the agency’s founder is still the main point of contact for every client, a buyer may lean towards the bottom end (2x = £400,000). If, instead, the business has account managers, recurring contracts, and the founder only oversees strategy, the risk is lower, pushing the multiple closer to 3x (£600,000) or even higher.

The takeaway is simple: your SDE sets the foundation, but the multiple tells the story of how transferable and valuable those earnings really are.

Other Common Methods of Valuing a Business.

While Seller’s Discretionary Earnings (SDE) is often the go-to method for small and owner-operated businesses, it’s not the only way to value a company. In fact, when I talk to business owners, I often walk them through the other main approaches so they understand the bigger picture. 

Each method has its place, and knowing the differences helps you avoid being blindsided by inflated or unrealistic expectations.

1. Asset-Based Valuation.

This is the most straightforward: you take the total value of the business’s assets (both tangible like property, machinery, stock, and intangible, like trademarks or goodwill), subtract the liabilities, and what’s left is the business value. 

It’s often used when the business isn’t very profitable or is winding down. For example, if you own a haulage company with £300,000 worth of trucks and equipment but very slim profit margins, the asset method might be more relevant than an earnings multiple.

2. EBITDA Multiple (Earnings Before Interest, Taxes, Depreciation, and Amortisation).

Think of this as the “big brother” of SDE. Instead of adding back owner salary and discretionary expenses, EBITDA normalises the accounts for a business that is professionally managed, usually larger than your average small business. Private equity firms and larger buyers tend to use EBITDA multiples.

3. Discounted Cash Flow (DCF).

This one is all about the future. It projects the cash the business is expected to generate over the coming years and then “discounts” it back to today’s value using a rate that reflects risk. In theory, it’s a beautiful model. In practice, for small businesses, it’s often too speculative because forecasting future cash flows accurately is almost impossible.

4. Market Comparables.

Sometimes the simplest way to value a business is to look at what similar businesses have sold for. Estate agents do this with houses, and the principle applies here too. The challenge is that data on private business sales isn’t always transparent, so comparisons can be rough.

5. Rule of Thumb Valuations.

Certain industries rely on shortcuts, like valuing a dental practice at a percentage of annual revenue or a pub at a multiple of weekly takings. These are quick and dirty, and while they can give you a ballpark, they’re no substitute for a thorough SDE or EBITDA-based valuation.

In my experience, many owners latch onto the highest-sounding method they can find. But the reality is that buyers, lenders, and the market will usually circle back to one thing: how much money does this business really generate for its owner? That’s why SDE remains such a practical, no-nonsense approach for most small businesses.

Why Business Owners Need to Ground Themselves in Reality.

One of the hardest conversations I have with business owners is explaining the gap between what they think their business is worth and what the market is actually willing to pay. And I’ll be honest, it’s often a painful moment. 

Nobody likes to be told their pride and joy, the thing they’ve poured their life into, isn’t worth as much as they imagined. But ignoring reality is the fastest way to waste time, money, and opportunity.

Here’s what I see time and again: owners set an asking price based on emotion rather than evidence. They believe their years of hard work or the “potential” of the business justifies a premium valuation. 

Then they list the business, wait months—or even years—without a serious offer, and wonder why nothing is happening. The truth is simple: buyers are savvy, lenders are cautious, and inflated valuations turn both off instantly.

I remember a manufacturing client who was convinced his company was worth £5 million. After working through his Seller’s Discretionary Earnings (SDE), the figure came out closer to £1.8 million. His reaction? Shock, frustration, and a bit of denial. But here’s the flip side: once he accepted the real number, he could focus on improving his SDE and building transferable systems to increase the multiple. 

Within three years, he had a much stronger, more saleable business, and yes, the valuation climbed significantly.

Grounding yourself in reality doesn’t mean selling yourself short. It means starting from a position of truth. SDE, combined with industry multiples and an honest look at owner dependency, gives you a defensible valuation that buyers will respect. 

The alternative is chasing a fantasy number, burning time with brokers who overpromise, and ultimately walking away disappointed when no deal closes.

So here’s my advice: don’t wait until you’re ready to sell to face reality. Run your numbers now. Understand what your business would fetch today, warts and all.

Then use that insight to make changes that genuinely increase its value. That way, when the day comes to exit, you’ll be negotiating from a place of strength, not wishful thinking.

Final Word: Building Value Before Selling.

If there’s one thing I’ve learned from years of working with business owners, it’s this: the sooner you start thinking about valuation, the better. Too many people only begin the process when they’re ready to sell, and by then, it’s often too late to make the kind of changes that significantly boost value.

Seller’s Discretionary Earnings (SDE) gives you a clear, no-nonsense foundation for understanding what your business is worth today. It’s not a vanity figure. It’s not based on what you need to retire or what your competitor down the road is asking for their company. 

It’s a clean, defensible measure of the true earning power of your business in the hands of a new owner. That’s why buyers, lenders, and serious investors trust it.

But here’s where it gets exciting: once you know your SDE, you’ve got the blueprint for increasing your value. Every unnecessary personal expense you strip out, every system you put in place to reduce owner dependency, every contract you secure to stabilise future income, all of these feed directly into either your SDE figure or your multiple. In other words, you’re not just running your business day to day; you’re actively building an asset that someone else will pay good money for.

I’ve seen the difference this makes. Owners who take valuation seriously early on have options. They can sell for a higher price, negotiate better terms, or even decide not to sell because they’ve created a business that runs smoothly without them and pays them handsomely. 

Owners who cling to fantasy valuations, on the other hand, often waste years chasing deals that never happen.

So my challenge to you is simple: stop guessing. Don’t rely on a broker’s flattering opinion or your own back-of-the-envelope calculation. Sit down, calculate your SDE, and face the truth of where your business stands today. 

Once you’ve done that, you’ll be in the driver’s seat. You’ll know exactly what levers to pull to grow value, and when the time comes to sell, you’ll have the confidence that your asking price isn’t just a number in your head, but a figure the market will respect.