Question 1

What is SDE, and how is it different from EBITDA?

Accepted Answer

SDE, seller's discretionary earnings, is the metric used for owner-operated businesses, typically those under about $5M in revenue. It adds owner compensation, discretionary personal expenses and genuinely one-off costs back to pre-tax profit, so it shows the total financial benefit available to a single owner-operator. EBITDA is used for businesses that already carry a management team, and it treats a market-rate salary for that management as a real operating cost. The two are not interchangeable. The same business will report a materially higher SDE than EBITDA, so a multiple quoted against one basis cannot be applied to the other. Indicative bands:

SDE multiple: owner-operated businesses2x to 4x

EBITDA multiple: businesses with a management team4x to 8x

Those bands are reconciled internal estimates, not a verified sample of closed transactions, and the spread within any sector is wide.

Question 2

How do you value a small business?

Accepted Answer

Apply a multiple to normalised earnings, then argue about the multiple. First, normalise: add owner compensation, one-off expenses and non-cash charges back to profit to arrive at SDE or EBITDA. Second, take an indicative multiple for the sector as a starting point. Third, adjust it for the factors that move a transaction: customer concentration, growth rate, the share of revenue that is contracted or recurring, and how much of the business walks out of the door with the owner. Fourth, sanity-check the result against the value of the underlying assets. The output should always be a range. A single figure implies a precision that private-company data does not support.

Question 3

What are comparable company analysis and precedent transactions?

Accepted Answer

Comparable company analysis values a business against similar quoted companies, applying their trading multiples with discounts for size and illiquidity. Precedent transactions look instead at prices actually paid for similar private companies. Precedent transactions usually read higher, because a controlling stake is worth more than a minority one and the price paid reflects that control. Both are benchmarks rather than appraisals: neither method knows anything about your accounts, your contracts or your customer list.

Question 4

What multiple should I use for my industry?

Accepted Answer

Multiples vary widely by sector, and the width of the band matters more than its midpoint. Indicative EV/EBITDA ranges: SaaS and software 10 to 20x; Healthcare services 8 to 12x; E-commerce 8 to 12x; Professional services 5 to 8x; Manufacturing 5 to 7x; Retail 4 to 6x; Restaurants 3 to 5x; Construction 3 to 5x. These are reconciled internal estimates, not a verified transaction sample. An individual business can sit well outside its sector band on growth, margin, scale or market position, so treat the range as the opening of a conversation rather than as evidence. FairlyValued benchmarks 42 industries; each carries its own as-of date and sample size.

Question 5

How often should a business be revalued?

Accepted Answer

Annually for internal planning, and again before anything consequential: a sale process, a fundraise, a partner buyout, a financing application, or estate and tax planning. Revalue outside that cycle whenever something material changes, a large contract won or lost, a key employee leaving, a shift in the sector. Valuations are time-sensitive, and one older than twelve months is generally treated as stale.

Question 6

What is the difference between enterprise value and equity value?

Accepted Answer

Enterprise value is the value of the business operations, irrespective of how they are financed: equity value plus debt, less cash. Equity value is what the owners actually receive once all debts and prior claims are settled. For a debt-free business the two are close. For a leveraged one the gap can be the difference between a good outcome and a disappointing one. Transaction multiples are almost always quoted on enterprise value, while a share price reflects equity value, check which basis a quoted multiple is using before you apply it.

The questions we are asked before a valuation

Still unanswered