SDE: The Multiples Myth

TLDR: Valuation isn’t just a formula, it’s a feeling too. While most buyers obsess over SDE times some mystery multiple, the real value lies in how believable and repeatable the profit is. Clean books, recurring revenue, and owner independence drive the multiple. And when it’s time to negotiate? It’s not math. It’s momentum.

Most Buyers Get Multiples Wrong, Here’s How It Actually Works

Ask most people how to value a business and you’ll hear the same thing: “It’s simple. SDE times a multiple.”

Straightforward, right? But here’s the problem… what exactly is the multiple based on? Who decides it? What even qualifies as SDE?

Most people are walking into valuation conversations thinking they’re dealing with a math problem. But they’re not. They’re dealing with a perception problem.

Here’s the real formula: Adjusted net profit × perceived certainty.

That’s the game. You’re not just multiplying numbers. You’re multiplying confidence.

Let’s break it down.

SDE, or Seller’s Discretionary Earnings, is already a loose concept. It’s profit, yes, but with a long list of add-backs: owner salary, personal expenses, one-time costs, non-cash items. So you already have wiggle room.

But the real question isn’t “What’s the profit?” It’s “How repeatable is the profit?”

That’s where perceived certainty comes in. And it’s driven by four key factors:

• Clean Books
  If the financials are a mess, you’ll spend more time decoding than deciding. Clean books create trust—and higher trust means a higher multiple.
  

• Recurring Revenue
  One-off projects and seasonal spikes are unpredictable. But predictable, subscription-based, or contract-backed revenue? That’s valuation fuel. Buyers pay more for cash flow they can count on.
  

• Transferable Systems
  Is the business running on SOPs, or on Post-it Notes stuck to the founder’s monitor? The more operationalized it is, the more value you can assign—because the risk drops dramatically.
  

• Owner Involvement
  This is huge. If the seller is still the chief everything officer—doing sales, managing ops, handling customer service—the multiple sinks. If they could disappear tomorrow and the business keeps humming? You’re paying for a machine, not a hustle.
  

So yes, SDE matters. But the narrative around it is what actually sets the multiple.

That’s why two businesses making the same profit can sell for wildly different prices. One gets 2.5x. The other gets 5x. It’s not just numbers—it’s how believable and durable those numbers feel.

And once you understand that, here’s where it gets even more interesting:

Valuation isn’t math. It’s negotiation.

It’s not just about what the business is “worth.” It’s about what makes the deal work—for both sides.

I’ve paid above-market multiples because I got better terms: longer earnouts, seller financing, reduced cash at close. I’ve also paid below-market because I moved fast, came in with certainty, and took the seller off the hamster wheel.

Sometimes I’ve paid zero down because I solved a problem no one else was willing to touch, like taking over a tired founder’s role or preserving their legacy.

That’s why the asking price is usually a fantasy. It’s not based on a real formula, it’s based on emotion, ego, and what the seller “feels” their business is worth.

But the actual value? That’s discovered in the process. Through trust, positioning, and deal structure.

So instead of obsessing over “the number,” ask smarter questions:

• Is the revenue consistent or choppy?
  

• Can this profit be repeated without the seller?
  

• Are there terms we can offer that matter more than cash?
  

• What narrative makes this valuation feel real?
  

Because in real acquisitions, math gets you to the table. But story closes the deal.

The multiple is never just a multiple. It’s a reflection of how believable the future looks once the seller is gone.

So let me ask…do you think most sellers actually know what their business is worth? Or are they just naming a number and hoping you believe it?

P.S. If you're ready to stop watching from the sidelines and start owning the field, let’s take the next step together. Click here to see exactly how I buy my businesses. 

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