Multiple of Discretionary Earnings

Income approach · also called the SDE multiple, seller’s discretionary earnings method

In the app this is the Earnings Multiple worksheet.

This is the workhorse method for small, closely held businesses where one owner’s labor and the return on the business are tangled together. Rather than pretend a market multiple applies, you score the company on seven operating and financial factors — earnings track record, industry growth, business growth, financing, competition, owner dependence, and customer concentration — and the average score sets the multiple on a curved scale from 2× (a score of 0) through about 3× (an average 2) to 7× (a perfect 4), so only an exceptional business approaches the top.

When to use it

• The business is actively managed by its owner and the buyer will step into that role.
• Revenue is roughly $250,000 to $5,000,000 and results are reasonably steady.
• Comparable transaction data for the niche is thin or unreliable.
• The likely buyer is an individual or a small partnership using SBA financing.

When it misleads

• The company has professional management in place and owner compensation is already at market — use capitalized earnings instead.
• Earnings are negative or wildly cyclical; the multiple magnifies noise.
• A strategic or private-equity buyer is likely, since they price on EBITDA and synergies.

What ExitSight asks you for

Worked example

The sample engagement — Riverbend Machine Works, Inc., a 34-employee machine shop in Springfield, Oregon: