When an owner and a buyer sit down over the same business, they are reading two different documents. The owner reads a story — years of work, a loyal customer list, a brand with their name on it. The buyer's analyst reads a machine: money goes in, money comes out, and the first hour of real diligence is spent computing five numbers that decide everything that follows. The multiple everyone obsesses over comes later, and by then it's mostly already decided.
This article shows you how to compute those five numbers on your own business — this quarter, not the quarter you decide to sell. (Scope note: this is the math of owner-operated businesses that sell to individual buyers and small acquirers — the world where the median sale runs about $349,000 at roughly 2.7x cash flow. Venture-backed startups are priced in a different market on different math. Our valuation whitepaper covers the full benchmark; this is the working companion.)
Number 1 — Your real SDE, the skeptic's version
Everything is a multiple of something, and for owner-operated businesses that something is Seller's Discretionary Earnings: net profit, plus your salary, plus your benefits run through the business, plus interest, taxes, depreciation, and genuine one-time costs. It answers the buyer's actual question — how much total benefit does one working owner pull from this business per year?
Here's what owners get wrong: they compute the optimist's SDE. Every gray expense becomes an "add-back" — the truck, the travel, the cousin on payroll, the "one-time" legal bill that somehow recurs. The buyer's analyst computes the skeptic's SDE: an add-back survives only if it comes with receipts and a straight face. The rule to apply to yourself: for every add-back, ask whether you'd defend it across a table from someone whose money is on the line. The gap between your optimist number and your skeptic number is the first — and often largest — valuation surprise, because the multiple applies to the skeptic's figure. A $40,000 add-back that dies in diligence isn't a $40,000 problem at 2.7x; it's a $108,000 problem.
Run it: last 12 months' P&L, recast line by line, every add-back documented. That number — not your revenue, not your profit — is what the market prices.
Number 2 — Your top customer's share
Divide your largest customer's trailing-12-month revenue by total revenue. That percentage is the second thing every buyer computes, because they aren't buying your history — they're buying the risk that your future walks out the door in one phone call.
The market's rough thresholds are consistent: above ~20%, expect discounts and deal-structure damage — earnouts, holdbacks, escrows tied to that customer staying; above ~40%, many buyers pass entirely, at any price, because they'd be buying a call option on someone else's procurement department. If your number is high, the fix is boring and slow — which is exactly why it's a this-quarter exercise, not a sale-season one: every new mid-sized customer you land dilutes the number, and two years of dilution is worth real money at closing.
Number 3 — Your fingerprint on the revenue
Buyers can't buy you. So they measure how much of the business is you: What percentage of sales did you personally close? Which customer relationships exist only with you? Could the business run 90 days with you unreachable — and has it ever had to?
Put a number on it the way an analyst would: the share of trailing-12 revenue where you personally sold, delivered, or hold the relationship. At 20%, you own a business. At 80%, you own a job with employees — and buyers price jobs accordingly, when they buy them at all. This is the number behind the discounts that owners experience as insulting lowballs; the buyer isn't insulting you, they're pricing the cost of replacing you. The fix has a name in every version: a second-in-command, documented processes, relationships deliberately transferred to the company. All of it takes years, none of it starts in diligence.
Number 4 — Your January 1 revenue
If the year started tomorrow, how much revenue already exists — contracted, subscribed, retained by default? Divide it by last year's total. That's your recurring percentage, and it may move price more than any other single lever, because a dollar that arrives without being re-sold is worth multiples of a dollar you must win again every quarter.
A project business at 5% recurring and a service business at 60% recurring can share an industry, a revenue line, and an SDE figure — and sell at opposite ends of the 2x–4x range. Anything that converts projects into programs (retainers, maintenance agreements, memberships, multi-year renewals) moves this number, and it's one of the few valuation levers that also makes the business calmer to run in the meantime.
Number 5 — The working capital the machine needs
The sleeper. Add your accounts receivable and inventory; subtract your payables. That's roughly the cash that must live inside the business for it to operate — and here is the ambush that ends deals: the seller assumes they keep the receivables; the buyer assumes a normal level of working capital comes with the business, because a machine sold without fuel isn't a running machine. Both are real market conventions. The catastrophe is discovering in diligence week eight that nobody wrote down which one this deal uses.
Numbers make it concrete. A business sells for $1,080,000 (that's $400k of SDE at 2.7x). On closing day it holds $250k of receivables and $100k of inventory against $120k of payables — about $230,000 of net working capital. Seller's math: price plus the $250k they'll collect. Buyer's math: price including normal working capital, because stripping it means injecting $230k of their own cash on day one just to make payroll while new receivables build. Same deal, mental models $230,000 apart — on a $1M transaction.
Sophisticated deals kill the ambush early: the letter of intent sets a working capital target ("the peg") — usually the trailing-12-month average — with a true-up at close: deliver more than the peg and the price adjusts up, less and it adjusts down. Your homework, long before any LOI: know your normalized working-capital number the way you know your revenue, keep the receivables clean so the number is real, and raise the treatment on day one of any sale conversation, not week eight.
Then — and only then — the multiple
Notice what the five numbers have in common: every one is computable from your own statements, today, for free — and together they determine where in your industry's range you land before anyone mentions a multiple. Two businesses with identical revenue and identical SDE routinely sell hundreds of thousands of dollars apart, and these five numbers are the entire explanation.
Our Business Valuation Template runs this exact exercise — the SDE recast, the driver scoring, and the industry benchmark ranges — and the full market data (the multiples table, what kills deals, the worked examples) is in the free whitepaper, What Your Small Business Is Worth. If the number is about to matter — a sale, a partner buyout, a divorce, an estate — a fixed-fee Advisory valuation review pressure-tests it before anyone signs anything.
The best time to read your business like a buyer is years before one shows up. The five numbers don't just predict your price — worked on early, they raise it.
Educational content, not a valuation opinion or transaction advice. Market figures reflect closed-transaction marketplace data (verified August–September 2026) and vary with deal structure and conditions.