The Three Numbers Every Business Owner Should Know — Starting With SDE

Your business isn’t worth a multiple of revenue. It’s usually worth a multiple of earnings.

One of the most common questions business owners ask is: “My business does $2 million a year. What do you think it’s worth?”

Revenue is an important number, but by itself, it tells a buyer very little about economic value:

• Company A generates $2 million in revenue and nets $100,000.

• Company B generates $2 million in revenue and produces $500,000 in cash flow.

From a buyer’s perspective, these are entirely different assets. If you plan to sell eventually, you should know three foundational numbers—not just to prepare for an exit, but to understand the health of what you are building today.

1. Seller’s Discretionary Earnings (SDE)

For most Main Street businesses, Seller’s Discretionary Earnings (SDE) is the baseline for valuation. SDE reflects the total economic benefit available to a single owner-operator.

Depending on the business, SDE typically includes:

• Net business profit

• Owner compensation and salary

• Legitimate discretionary, owner-related perks

• One-time, non-recurring expenses

• Appropriate non-cash add-backs (such as depreciation)

SDE answers the essential question: “How much cash does this business actually put in an owner’s pocket?”

Revenue vs. SDE in Practice

Imagine a business generating $2,000,000 in revenue and $400,000 in SDE. While the top-line revenue sounds impressive, a buyer focuses on the $400,000. Revenue is simply what comes in the door; earnings are what support debt service, owner income, and the ultimate purchase price.

Revenue Measures Activity; Earnings Measure Value

Top-line growth doesn’t always equal enterprise value.

Both companies generate identical sales, but Business B delivers twice the discretionary cash flow. Consequently, Business B commands a significantly higher market valuation. Focus on growing the bottom line alongside the top line.

The Catch: Not Every Add-Back Is Legitimate

Owners often assume every personal or unusual expense can automatically be added back to increase value. That is rarely the case.

Lenders and savvy buyers scrutinize every recast expense by asking: “Will this expense disappear after the sale, and will the new owner genuinely capture that savings?”

If personal travel, family cell phones, or non-essential perks cannot be cleanly documented or defended, buyers will discount them. A proper financial recast isn’t about inflating numbers; it’s about presenting a defendable, transparent economic picture.

What Determines the Quality of Your Earnings?

Two businesses with identical SDE can trade at very different multiples based on earnings durability and risk:

• Owner Dependency: Can the company run without you, or is the buyer just purchasing a demanding job?

• Customer Concentration: Does a single client account for more than 15–20% of total sales?

• Revenue Quality: Are revenues recurring and supported by transferable contracts?

• Financial Integrity: Are books and tax returns clean, reconciled, and verifiable?

• Capital Intensity: Does the operation require heavy ongoing equipment upgrades and working capital?

If you handle sales, operations, bidding, and key accounts yourself, your SDE carries higher risk, which compresses your valuation multiple.

The Three Numbers That Tell Your Story

Rather than waiting until retirement to ask what your company is worth, track these three operational metrics today:

1. SDE: The true economic benefit generated for the owner-operator.

2. Revenue Quality: Top-line volume, stability, and recurrence.

3. Working Capital Needs: The cash required to fund receivables, inventory, and operations day-to-day.

Understanding these metrics shifts your mindset from “How big is my revenue?” to “How durable and valuable is the asset I’m building?” Buyers don’t buy your past sales; they buy your future cash flows.