What SDE Measures
Valuation begins with a consistent earnings base, not a multiple pulled from a headline. For smaller owner-operated businesses, Seller’s Discretionary Earnings may help show cash flow available to one working owner; EBITDA is more common as businesses become larger and management compensation is treated differently. Normalize the chosen metric before applying any range.
A multiple is shorthand for many underlying judgments. Growth quality, customer and channel concentration, margins, recurring revenue, owner workload, defensibility, documentation and transferability can all affect how buyers view the same dollar of earnings. Comparable transactions are useful context only when the businesses and deal terms are genuinely comparable.
Build a range and test scenarios rather than presenting a single precise answer. Consider the cash paid at closing as well as financing, earnouts, working capital and transition obligations. The economically attractive deal is not always the one with the lowest headline multiple.
What EBITDA Measures
Valuation begins with a consistent earnings base, not a multiple pulled from a headline. For smaller owner-operated businesses, Seller’s Discretionary Earnings may help show cash flow available to one working owner; EBITDA is more common as businesses become larger and management compensation is treated differently. Normalize the chosen metric before applying any range.
A multiple is shorthand for many underlying judgments. Growth quality, customer and channel concentration, margins, recurring revenue, owner workload, defensibility, documentation and transferability can all affect how buyers view the same dollar of earnings. Comparable transactions are useful context only when the businesses and deal terms are genuinely comparable.
Build a range and test scenarios rather than presenting a single precise answer. Consider the cash paid at closing as well as financing, earnouts, working capital and transition obligations. The economically attractive deal is not always the one with the lowest headline multiple.
Owner Add-Backs
Map the operating rhythm by day, week and month. Identify tasks performed by the owner, employees, contractors, suppliers and software. Ask how exceptions are handled, not only how the standard process works; unusual cases often reveal where undocumented knowledge sits.
Estimate the real replacement workload. An owner may describe a task as only a few hours while relying on years of tacit knowledge, relationships or quick decisions. Document procedures, access, service levels and the cost of replacing work the seller currently performs.
A buyer should know what must remain stable during transition. Critical suppliers, contractors, fulfillment partners and customer-support routines deserve early attention so the first weeks of ownership do not accidentally disrupt revenue.
Normalization
Define what this step is meant to prove before collecting documents. Good diligence connects a claim to evidence, identifies what remains uncertain and asks whether the issue can materially affect future cash flow or transferability.
Compare the current state with historical patterns. One month or one screenshot rarely tells the full story. Look for trends, exceptions and dependencies, then ask the seller to explain material changes with evidence that can be independently checked where practical.
Record the conclusion and its effect on the deal. Some findings simply confirm the thesis; others change valuation, transition planning or transaction terms. The purpose is a better-informed decision, not paperwork for its own sake.
Which Metric Fits
Define what this step is meant to prove before collecting documents. Good diligence connects a claim to evidence, identifies what remains uncertain and asks whether the issue can materially affect future cash flow or transferability.
Compare the current state with historical patterns. One month or one screenshot rarely tells the full story. Look for trends, exceptions and dependencies, then ask the seller to explain material changes with evidence that can be independently checked where practical.
Record the conclusion and its effect on the deal. Some findings simply confirm the thesis; others change valuation, transition planning or transaction terms. The purpose is a better-informed decision, not paperwork for its own sake.
Common Mistakes
Define what this step is meant to prove before collecting documents. Good diligence connects a claim to evidence, identifies what remains uncertain and asks whether the issue can materially affect future cash flow or transferability.
Compare the current state with historical patterns. One month or one screenshot rarely tells the full story. Look for trends, exceptions and dependencies, then ask the seller to explain material changes with evidence that can be independently checked where practical.
Record the conclusion and its effect on the deal. Some findings simply confirm the thesis; others change valuation, transition planning or transaction terms. The purpose is a better-informed decision, not paperwork for its own sake.