How a small service business is valued: SDE, add-backs and the multiple

A buyer values a small service business as a multiple of its seller’s discretionary earnings (SDE): pre-tax profit plus the owner’s pay and perks, one-time costs, depreciation, amortization and interest. BizBuySell’s 2025 figures put the average service business sale at about 2.5 times cash flow. What moves a business above or below that is how much of the earnings keep coming in once you leave.

Start with SDE

BizBuySell describes seller’s discretionary earnings as the total financial benefit a business provides to one owner. You start from net profit before taxes and add back expenses that a new owner would not carry or that exist because of how you run the company. One way to put it: SDE equals EBITDA plus the pay of one working owner.

BizBuySell sorts add-backs into five groups:

• discretionary personal expenses run through the business;
• discretionary operating expenses a new owner could drop;
• non-operating expenses, such as interest on debt the buyer will not take on;
• non-recurring expenses, such as a one-time legal bill;
• depreciation and amortization.

For a single owner-operator, the owner’s full compensation goes back in: salary, payroll taxes on it, health insurance, retirement contributions, and perks paid by the company.

A worked example

An illustration with round numbers, not a valuation of any real company:

• Pre-tax profit on the tax return: $80,000
• Owner’s salary and the payroll tax on it: $65,000
• Owner’s health insurance paid by the company: $10,000
• Depreciation on trucks and equipment: $15,000
• One-time cost to settle a dispute: $8,000
• SDE: $178,000

At 2.5 times, that business prices at $445,000. At 2 times it is $356,000, and at 3 times it is $534,000. The gap between those three numbers is what the rest of this post is about.

Add-backs that hold up, and ones that do not

A buyer pays for earnings they can verify on tax returns and bank statements. Owner pay, documented personal expenses, depreciation, interest and a real one-time cost all survive that test. These tend not to:

• A “one-time” expense that shows up every year under a different name. Three years of returns make the pattern visible.
• Family on the payroll who do real work. If the buyer has to replace your spouse who runs dispatch, that wage stays in.
• Your labor in the field. If you run a crew as its lead technician, a buyer who does not will hire one, and the market wage for that job comes off SDE.
• Income that never reached the books. A buyer cannot finance or pay for earnings they cannot see.

What moves the multiple

Two companies with the same SDE can sell at different multiples, and the difference comes from risk the buyer takes on after you leave.

How much of the business is you

If customers call your cell, you write every estimate, and the crew waits on you each morning, a buyer is buying a job and prices it that way. A company with a lead who runs jobs and an office that books them is worth more per dollar of earnings.

Recurring revenue

Maintenance agreements, service contracts and repeat commercial accounts carry over to a new owner in a way that one-off jobs do not.

Customer concentration

If one customer brings a large share of revenue, losing that account after closing could erase a year of the buyer’s return, and the price reflects it.

People, licenses and equipment

A crew that stays through the sale, a license the business can keep after you go, and trucks and tools in working order all lower the buyer’s cost to take over. A trade license in your name alone needs a plan before closing.

Books and trend

Books that match the tax returns and the bank deposits shorten due diligence. Three years of steady or rising revenue support a higher multiple than a decline does, and a buyer reads the margin on that revenue as closely as the revenue itself.

How the price gets paid

The price and the payment terms are separate questions. A deal can be cash at closing, a seller note paid over time, a payment tied to future results, or a mix. Carrying a note can raise the total you receive, and our page on owner financing explains the trade.

In an asset sale, the price is split across equipment, vehicles, goodwill and the other assets. When goodwill or going-concern value is part of the deal, the IRS requires both buyer and seller to report the allocation on Form 8594. Agree on the split in the purchase agreement so both forms match.

Run your own numbers

Our SDE calculator walks through the add-backs with your figures, and selling a service business covers what a buyer looks at and how to sell without your crew hearing about it early. Our record so far: 20+ real estate transactions and 16 business acquisitions across Tennessee, North Carolina, Georgia and South Carolina.

This is general information, not legal or tax advice. Talk to a Tennessee attorney or CPA about your situation.