By Curt Roese | Published: July 31, 2026 | Last updated: July 31, 2026
Revenue tells you how much money moves through a business. It does not tell you what stays. To actually value a small business, start with seller's discretionary earnings (SDE), the real economic benefit left for one owner-operator, then apply an industry multiple, typically 2.5x to 3.5x SDE in 2026.
Most buyers evaluate a business the same way they skim a headline. They see the biggest number on the listing and form a conclusion before they've asked a single real question. This post walks through the five questions that separate a business that looks valuable from one that actually is, using a real HVAC acquisition as the working example throughout.
What Does "Seller's Discretionary Earnings" Actually Measure?
SDE measures what a business puts in one full-time owner's pocket after real operating costs, not what it collects in sales. It starts with pre-tax income and adds back owner compensation, interest, depreciation, amortization, and discretionary expenses.
That last category is where things get complicated. Add-backs are judgment calls, not a formula. A truck payment might be a legitimate business expense or a personal vehicle run through the company. A "one-time" consulting fee might recur every year.
As a CPA, the mistake I saw most often wasn't fraud. It was optimism. Sellers (and the brokers representing them) tend to interpret every gray-area expense in the direction that makes SDE look bigger.
That means the SDE on the listing and the SDE you'd actually experience as the new owner are often two different numbers. Not because anyone lied. Because reasonable people can disagree about what counts as "discretionary."
How Hard Is the Current Owner Working for That Number?
SDE assumes one full-time owner-operator. If the current owner is doing the work of three people, the number you're looking at isn't free profit. It's unpaid labor wearing a profit costume.
Consider a business where the owner handles sales, dispatch, hiring, and weekend emergency coverage. That owner isn't earning $155,000 in pure profit. They're earning $155,000 for running four jobs at once, and at least some of that value disappears the moment you have to pay someone else to do what they did for free.
Before you get attached to a number, ask what it would cost to replace every function the current owner performs. Sales manager. Operations lead. On-call technician. Add those salaries back into the cost side, and the "profit" you thought you were buying often looks a lot thinner.
What's a Good SDE Multiple for a Small Business in 2026?
For most owner-operated small businesses, a fair multiple in 2026 runs 2.5x to 3.5x SDE, with higher-demand sectors like HVAC and plumbing trading closer to the top of that range or above it.
In Q2 2026, the average cash flow multiple for small businesses sold nationally was 2.7x, on a median sale price of $349,250, according to the BizBuySell Insight Report. HVAC businesses specifically tend to command a premium over that average because of recurring service revenue and steady demand.
| Metric | What It Measures | Best Used For | Typical Multiple (2026) |
|---|---|---|---|
| Revenue | Total sales collected | Rough size comparison only | Not reliable |
| SDE | Owner's total economic benefit | Owner-operated businesses under $1-2M SDE | 2.5x-3.5x |
| EBITDA | Earnings before interest, taxes, depreciation, amortization | Businesses with professional management already in place | 3x-6x |
A multiple isn't a guarantee. It's a starting point that still has to survive due diligence, financing, and a real conversation about the business's specific risks.
Can the Business Survive a Bad Month After You Take Over?
A business can look profitable on paper and still leave almost no cushion if revenue dips even slightly in the first year. That gap between "profitable" and "survivable" is where a lot of buyers get hurt.
Take the HVAC example this post is built around. Asking price: $950,000. Annual revenue: $2.1 million. After payroll, trucks, parts, marketing, and admin, remaining SDE lands around $155,000.
| Line Item | Annual Amount |
|---|---|
| Revenue | $2,100,000 |
| Payroll | $1,100,000 |
| Trucks, fuel, maintenance | $240,000 |
| Parts and materials | $310,000 |
| Marketing | $85,000 |
| Insurance, rent, software, admin | $210,000 |
| Remaining SDE | ~$155,000 |
| SBA 7(a) debt service (10% down, 10-year term) | ~$120,000-$135,000 |
| Owner income after debt, before taxes | ~$20,000-$40,000 |
SBA 7(a) financing is how most buyers in this price range fund a deal like this, and it's typically 10% down over a 10-year term. That debt is repaid from the business's cash flow, not from the buyer's outside income.
Run the math on that HVAC deal and the owner's take-home after debt service could fall to $20,000 to $40,000 before taxes if performance softens even slightly. That's before truck replacement, a needed hire, or any real demand slowdown.
Before you sign anything, stress-test the downside. What does your income look like if revenue drops 10 to 15 percent in year one? If the answer is "I can't pay myself," the asking price is wrong, regardless of what the multiple says.
Is All That Revenue Actually Worth Having?
Not every dollar of revenue costs the same to keep, and some revenue is more fragile than it looks on a summary page. A business earning most of its top line from a handful of demanding accounts is a different asset than one with broad, stable customer relationships.
Ask where the revenue actually comes from. Is it spread across hundreds of steady residential customers, or concentrated in three commercial accounts that could walk with one bad service call? Is it seasonal, spiking hard for four months and thin the rest of the year?
When I ran my own construction company, the number that mattered most wasn't the total contract value. It was which clients paid on time, which ones caused the most disruption, and which relationships depended entirely on me personally showing up. Revenue quality is invisible on a listing page. It only shows up when you ask.
Would a Lender (and Another Buyer) Actually Want This Deal?
A business's real value isn't what the seller believes it's worth. It's what a rational, informed buyer would confidently pay, and what a lender would actually agree to finance.
SBA 7(a) loans explicitly cover changes of ownership up to $5 million, but lenders underwrite based on demonstrated ability to service debt, not gross revenue. A business that's busy, owner-dependent, and hard to hand off does not underwrite well no matter how good the top line looks.
From the lender side, what actually happens is simple: underwriters want to see that the business can pay its debt, pay a reasonable owner salary, and keep functioning without the seller in the building. If any one of those three breaks, the deal gets harder to finance, and harder to sell to the next buyer down the road too.
That's the real test. Not "is this business busy," but "could someone else step in and run it profitably starting Monday."
Frequently Asked Questions
What's a good SDE multiple for a small business?
Most owner-operated small businesses sell in the 2.5x to 3.5x SDE range as of 2026, with in-demand sectors like HVAC and plumbing sometimes trading higher. The right multiple for a specific deal depends on industry, growth trend, customer concentration, and how dependent the business is on the current owner.
How do I know if a seller's SDE is inflated?
Ask for a line-by-line breakdown of every add-back, not just the total. Question anything discretionary, personal, or "one-time" that shows up more than once. If the seller or broker can't explain an add-back clearly, treat it as unconfirmed until you can verify it independently.
What's the difference between SDE and EBITDA?
SDE adds back the owner's full compensation because it assumes one working owner-operator. EBITDA does not add back a market-rate salary, because it assumes a professional management team already in place. Using EBITDA on an owner-run business will understate what the owner actually earns from it.
How much cash flow do I need to qualify for an SBA acquisition loan?
Lenders want to see that the business's cash flow comfortably covers debt service plus a reasonable owner salary, not just covers the loan payment with nothing left over. The exact figure depends on loan size, term, and current SBA 7(a) rates, so get a specific number from a lender before you make an offer.
Can I negotiate the price down if add-backs look aggressive?
Yes, and you should. If you and your accountant recalculate SDE using more conservative add-back assumptions, that recalculated number, not the seller's original figure, is the one to negotiate from. A defensible, documented counter-number carries far more weight than simply asking for a lower price.
What happens to my income if the business underperforms in year one?
Model it before you buy, not after. Take the current SDE, subtract your actual debt service, and then run the same math assuming revenue drops 10 to 15 percent. If that scenario leaves you unable to pay yourself, you need a larger down payment, a lower price, or a different business.
Key Takeaways
Revenue tells you how much money moves through a business. It does not tell you what stays behind after payroll, debt, and the owner's own labor are accounted for. SDE is where a real valuation conversation starts, not the revenue line.
Add-backs are judgment calls, and the seller's stated SDE is often not the number you'll actually experience as the new owner. A business that depends heavily on the current owner isn't as valuable as it looks, because that owner's labor isn't free.
The clearest test of a business's real worth is simple: can it service its debt, pay you a reasonable income, and keep running without the seller there. If you can't answer yes to all three, the price is wrong no matter what the top line says.
Next Steps
Before you make an offer on any business, request a line-by-line add-back breakdown from the seller or broker and recalculate SDE yourself using conservative assumptions. For the full walkthrough of this HVAC example and all five questions in detail, watch the video above or visit the Main Street Ledger YouTube channel.
Explore more on Main Street Ledger for guides on buying, financing, and operating a small business.
Curt Roese is a small business expert whose background spans CPA work, ten years as owner-operator of a custom home building company, and a stretch as CFO of an SBA lender with hands-on exposure across all aspects of SBA lending. He founded Main Street Ledger to help business buyers and owners navigate acquisitions, franchise ownership, and small business finance from the buyer's side of the table. Read more about Curt.