If you own a small business that has a value of five million dollars or less, then the valuation of your business will most likely be based on your Seller’s Discretionary Earnings (SDE) which is also called Owner’s Discretionary Earnings.

SDE is basically calculated by adding the salary, payroll taxes, health benefits, retirement benefits, and financial perks that you, the Owner of the business, were able to provide for yourself.

This gives potential buyers a good idea of how much income they can expect if they buy your business.

Typically 70% of the small businesses on the market are selling for less than $200,000 with a multiple of 3 or less times their SDE with most of those businesses never being sold. This is due to the fact that owners have worked hard for what could be years and earned less than $75,000 a year doing so. They have only succeeded in creating a long-hour low paying job that is not attractive to potential buyers.

By completing and optimizing all of the 12 key business success elements, the goal is to have your business create at least $100,000 in owner’s discretionary earnings and achieve a 4 or 5 multiple of those earnings. Then if you elect to sell you could walk away with half a million dollars or more.

Businesses with strong owner’s earnings and that have completed and optimized all 12 key success elements are usually very attractive to potential buyers and command a premium price when sold.