Say a business owner runs a $1.2 million pest control company. He opens his tax return, finds net profit of $180,000, and does the math on what that’s worth. At a 2.5x multiple, that’s $450,000. After 14 years of 6 a.m. starts, it feels light. Here’s the thing. He’s probably looking at the wrong number. The number buyers use is called seller’s discretionary earnings, or SDE. It’s what the business earns for one owner-operator before the owner’s pay and before the expenses that exist because of how the owner runs the company. And for this owner, that number is closer

Most owners negotiate the purchase price for weeks. Then they sign a purchase agreement with an allocation schedule buried near the back, and give it about four minutes of attention. That schedule can be worth more than the last $50,000 of price you fought for. Here’s the setup. In an asset sale (which is how the vast majority of small business deals are structured), the buyer isn’t purchasing “a business” in the eyes of the IRS. They’re purchasing a pile of individual assets: equipment, inventory, customer lists, a trade name, goodwill. The total price has to be divided among those

Picture two pool companies in Montgomery County. Each one grosses $620,000 a year. Each one runs a couple of trucks out of a rented shop; one in Montgomeryville the other in Conshohocken. One will sell for roughly 2.5 times its earnings. The other will have a hard time getting a buyer to finish diligence. Same revenue. Same county. Same pools, more or less. The difference is what that revenue is made of. Two $620,000 companies Say the first company is a route business. Of its $620,000, about $430,000 comes from weekly service accounts: chemicals, brushing, basket cleaning, filter checks, billed

Your CPA’s valuation is not an asking price. That sounds obvious until an owner holds two documents side by side and has to decide which one is “the number.” Say a business owner runs a pool service company. $1.3 million in revenue, $330,000 in SDE (seller’s discretionary earnings, meaning profit plus the owner’s pay and personal perks). A few years ago, a business appraiser produced a formal valuation for the company’s buy-sell agreement. This year, a broker prepares a broker opinion of value (BOV) because the owner is thinking about selling. The appraisal says $539,000. The BOV says $858,000. Same

Every roof you’ve installed in the last ten years is still on your books. Not on the balance sheet. Nowhere an accountant would find it. But a buyer will find it, and they’ll put a number on it before the first LOI goes out. Let’s take a situation where a West Chester roofing company does $2.4 million a year in revenue and $480,000 in SDE (seller’s discretionary earnings, meaning what the business throws off for one owner-operator once you add back the owner’s pay and one-time items). The owner figures 3.5x to 4x is fair. That’s $1.7 to $1.9 million.

Say a Fishtown commercial printing and signage company is under LOI. Revenue is $1.2 million, SDE (the owner’s total earnings from the business) is $310,000, and the price is $837,000, or 2.7x. The buyer is forming a new LLC, and their SBA lender has issued a commitment letter with a clock on it. Three weeks before closing, the buyer’s attorney goes to set up the new entity’s city accounts and licenses. The City asks for proof of good tax standing. The seller’s account shows a $14,600 balance: unpaid wage tax withholding from two quarters when cash was tight, plus the