Document #11: Business Valuation 101

The Only Numbers That Matter

Forget what sellers tell you. Forget what brokers claim. There are only 3 numbers that determine value:

SDE (Seller's Discretionary Earnings)
Multiple (Based on risk and size)
Working Capital (Often ignored, always important)

Step 1: Calculate True SDE

SDE = Net Profit + Owner Salary + Owner Perks + One-Time Expenses

Start with: Tax Return Net Profit Add back: + Owner salary/draws + Owner health insurance + Owner car payments + Owner cell phone + Family members on payroll + Personal travel as "business" + One-time legal fees + One-time repairs + Depreciation + Interest = True SDE (what you'll actually make)

Real Example: Painting Company

Line Item	Amount
Net Profit (tax return)	$87,000
Owner Salary	$65,000
Wife "Admin" (does nothing)	$35,000
Owner Health Insurance	$18,000
"Company" F-150	$12,000
One-time lawsuit settlement	$25,000
Depreciation	$15,000
True SDE	$257,000

Seller claimed: "Barely profitable!"
Reality: $257K in owner benefit

Step 2: Apply The Right Multiple

Service Business Multiples (2024)

SDE Range	Typical Multiple	Why
Under $100K	1.5-2.0x	Basically buying a job
$100K-$250K	2.0-2.5x	Sweet spot for SBA
$250K-$500K	2.5-3.0x	Real business
$500K-$1M	3.0-3.5x	Systems in place
Over $1M	3.5-4.5x	True enterprise

Multiple Adjustments

Add 0.5x for:

90%+ recurring revenue
No owner involvement (<10 hrs/week)
5+ year track record
Growing 10%+ annually

Subtract 0.5x for:

Customer concentration (>30% one client)
Declining revenue
Owner is the business
Expiring lease/contracts

Step 3: The Working Capital Trap

⚠️ Most buyers miss this and overpay by $50-100K

Working Capital = Current Assets - Current Liabilities

You need to SUBTRACT missing working capital from purchase price!

Example:

Accounts Receivable: $80,000
Accounts Payable: $50,000
Normal WC needed: $75,000
Actual WC: $30,000
Shortage: $45,000 (reduce price by this)

The 5-Minute Valuation Formula

Quick Valuation = (True SDE × Multiple) - WC Adjustment - Repairs

Our Painting Company:

True SDE: $257,000
Multiple: 2.5x (standard for this size)
Base Value: $642,500
WC Shortage: -$45,000
Deferred Repairs: -$20,000
Fair Value: $577,500

Seller asking: $850,000
Our offer: $575,000
Savings: $275,000

Negotiation Ammunition

When seller balks at your "low" offer, show them:

Their tax returns (not their "recast" fantasy)
Comparable sales (from BizComps)
Bank lending limits (they'll finance based on YOUR calculation)
Time on market stats (avg 270 days)

The killer phrase: "I'm offering what the bank will lend on. If you think it's worth more, find a cash buyer."

Quick Sanity Checks

Walk away if:

Price > 3x SDE (unless truly passive)
"Pro forma" projections used for pricing
No tax returns provided
Multiple "adjustments" exceed 50% of claimed SDE
Seller won't provide 3 years of data

Your Next Action

1. Find a listed business in your target industry
2. Request their last 3 tax returns
3. Calculate true SDE using this framework
4. Compare to asking price
5. Make an offer at the RIGHT valuation

Remember: Sellers price on hope. Banks lend on reality. Buy on reality and let them keep their hope.

This is document 11 of 20 in the Blueprint Starter Pack. The complete Blueprint System contains advanced valuation models, industry-specific multiples, and negotiation scripts that routinely cut 30-50% off asking prices.

Ready for everything? Visit myleskameron.com/blueprint

P.S. Just saved $100K+ using this framework? That's worth celebrating. Reply and tell me about it.