How Much Should You Offer for a Business?

Start With SDE, Not Asking Price

Seller's Discretionary Earnings is the foundation of every small business valuation. It represents the total economic benefit a working owner gets from the business: net profit plus owner salary, plus add-backs for depreciation, amortization, one-time expenses, and non-operating costs.

Before you think about what to offer, calculate SDE independently — not from the seller's stated number, but from the tax returns. Sellers have an incentive to maximize reported SDE (higher SDE = higher price). Your job is to verify it. Request three years of business tax returns and a year-to-date P&L. Add back the owner's W-2 or draw, depreciation, amortization, and any documented one-time costs. The resulting number is your starting point.

If the seller's stated SDE and your calculated SDE are more than 10% apart, you have two options: ask the seller to document every add-back, or discount the stated SDE in your offer model. Don't anchor to a number you can't verify. The SDE you use in your offer model is only as good as the documentation behind it.

Also check the trend. A business with $500K SDE this year is worth more than one that had $700K two years ago and has been declining. Three years of data tells you whether the earnings are stable, growing, or compressing — and the trend materially affects what multiple is appropriate.

Apply the Right Multiple for the Industry

Once you have a verified SDE, you need to multiply it by the appropriate industry multiple to get to a fair value range. SDE multiples in the $1M–$5M deal market vary significantly by business type.

Service businesses — trades, cleaning, staffing, landscaping — typically trade at 2–4x SDE. These businesses require the owner's active involvement, often have customer relationships tied to the current owner, and carry higher transition risk. That risk compresses the multiple.

Manufacturing and distribution businesses tend to trade at 3–5x SDE. The presence of physical assets, established supplier relationships, and switching costs in B2B customer relationships supports a higher multiple than pure services.

Tech-enabled and SaaS-adjacent businesses command 4–7x SDE, driven by recurring revenue, low marginal cost per additional customer, and high switching costs. At the high end of this range, you're typically buying a business with strong month-over-month recurring revenue and documented low churn.

Within any range, adjust for specific risk factors: customer concentration (one client over 30% of revenue is a discount), owner dependency (can the business run two weeks without the seller?), lease terms (is there a long-term assignable lease or an annual renewal?), and the quality of the employee base. A business at the top of its industry range should have demonstrably low risk on all of these dimensions.

• Service businesses: 2–4x SDE
• Manufacturing and distribution: 3–5x SDE
• Tech-enabled and SaaS-adjacent: 4–7x SDE
• Adjust down for: customer concentration, owner dependency, short lease, weak staff

Adjust for Deal Structure

The offer price and the effective price the buyer pays are not always the same number. Deal structure — how the purchase price is financed, what contingencies are attached, and how the transaction is classified for tax purposes — can change the real economics significantly in either direction.

Seller financing reduces the buyer's upfront cash requirement and can make a deal viable at a higher headline price than an all-cash or SBA-only deal. A buyer who can negotiate a $150K seller note at 6% over 5 years is effectively financing part of the price at below-market rates. That has value — and in a negotiation, a buyer offering a higher headline price with a seller note is often more attractive to a seller than a lower all-cash offer.

Earnouts defer a portion of the purchase price until post-close performance targets are met. They allow a seller to claim a higher headline number while giving the buyer protection if the business underperforms. In practice, earnouts create friction — disputes over how metrics are calculated, disagreements over buyer decisions that affect the earnout, and legal complexity. Use them when there's a specific growth catalyst (a new contract, a product launch) that justifies a premium the trailing financials don't yet support. Avoid them as a substitute for proper pricing discipline.

Asset vs. stock deals have significant tax implications that affect the effective price for both parties. In an asset deal, the buyer gets a step-up in basis on the acquired assets, allowing accelerated depreciation — which reduces taxable income in the early years of ownership. In a stock deal, the buyer takes on the seller's historical tax basis, eliminating that benefit. Sellers generally prefer stock deals (capital gains treatment); buyers generally prefer asset deals (depreciation benefit). The difference in after-tax cost can be substantial, and it's worth modeling before you negotiate.

Every structural choice changes the real cost to the buyer and the real proceeds to the seller. A clean offer that accounts for structure — rather than just headline price — is both more sophisticated and more likely to close.

Stress-Test With DSCR

Once you have a proposed offer price and a financing structure, the final check before you write an LOI is DSCR. Your offer may seem reasonable on a multiple basis, but if the resulting debt service can't be supported by the business's cash flow, the deal either won't get SBA financing or will create a cash flow crisis in year one.

The calculation: take the business's verified SDE, subtract a market-rate owner salary for the new operator, and divide that net operating income by the total annual debt service (SBA payment plus seller note payment, if active). The result needs to clear 1.25x minimum — and ideally 1.35x or higher to leave a cushion for first-year transition risk.

If your proposed offer price produces a DSCR below 1.25x with standard SBA financing, you have two options: lower the offer price until the math clears, or restructure the seller note onto standby so it doesn't count in the DSCR calculation during the first 24 months. Both are legitimate paths. What isn't legitimate is submitting an LOI and hoping the lender overlooks the coverage gap — they won't.

A DSCR check also reveals when you're lowballing. If the business has $600K SDE and you're offering $1.5M (2.5x), the debt service is comfortably covered and the deal is structurally sound. But if 2.5x is below market for that industry, the seller won't accept it. The DSCR floor sets your minimum viable offer; the market multiple sets the range. Your final number lives between those two constraints.

Run Your Offer Number

The four steps above — verify SDE, apply the industry multiple, adjust for structure, stress-test with DSCR — give you the inputs for a defensible offer. But doing all four manually for every deal in a live sourcing pipeline takes time you may not have.

A deal analysis tool collapses all four steps into a single model. Input the SDE, the asking price, your proposed loan structure, and the industry category — and get back the implied multiple, a DSCR check, and a suggested offer range based on what the business can support. That's the analysis you want before you call the broker, not after.

Knowing your number going into the conversation also changes how you negotiate. Instead of reacting to the asking price, you're presenting a reasoned counter with the math to back it up. Sellers and brokers respond differently to a buyer who says 'based on SDE and comparable multiples in this category, the supportable price range is X–Y' than to one who says 'the asking price feels high.' Showing your work is a signal of seriousness — and it often moves negotiations faster than intuition-based counter-offers.

Frequently Asked Questions