Why Getting the Acquisition Price Right Is Everything
The purchase price of a small business is the single most important number in any acquisition. Pay too much, and you’ll struggle to service your SBA loan. Pay too little, and the seller walks away. Get it right, and you set yourself up for a profitable business from day one.
But how do you actually calculate what a small business is worth? It’s not as straightforward as looking at revenue or profit. Valuation involves understanding earnings metrics, industry multiples, asset values, and — critically for SBA buyers — what lenders will actually finance.
At GoSBA Loans, we’ve helped facilitate over $320 million in SBA funding in 2025 through our network of 50+ lenders. We’ve seen how pricing affects deal success firsthand. This guide breaks down the methods, metrics, and strategies you need to calculate the right acquisition price.
SDE vs. EBITDA: When to Use Which
Before you can calculate a price, you need to determine the right earnings metric. The two most common are Seller’s Discretionary Earnings (SDE) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Seller’s Discretionary Earnings (SDE)
SDE is the standard earnings metric for small, owner-operated businesses — which describes most SBA acquisition targets. SDE represents the total financial benefit a single owner-operator receives from the business.
SDE = Net Income + Owner’s Salary + Owner’s Benefits + Interest + Depreciation + Amortization + One-Time/Non-Recurring Expenses
SDE add-backs typically include:
- Owner’s salary and payroll taxes
- Owner’s health insurance, retirement contributions, and other personal benefits
- Personal expenses run through the business (vehicle, phone, travel)
- One-time expenses (lawsuit settlement, equipment replacement, rebranding)
- Non-cash expenses (depreciation, amortization)
When to use SDE: Businesses with revenue under $5 million where the owner is actively involved in operations. This covers the vast majority of SBA acquisitions.
EBITDA
EBITDA is used for larger businesses where the owner functions more as an investor than an operator, and professional management is already in place.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
The key difference: EBITDA does not add back the owner’s salary because the assumption is that you’ll need to hire (or continue paying) a manager to run the business.
When to use EBITDA: Businesses with revenue above $5 million, businesses with absentee owners, or businesses with a professional management team in place.
Why This Distinction Matters for Pricing
Using the wrong metric inflates or deflates the business value significantly. An SDE-based business valued at 3x SDE might look equivalent to 5-6x EBITDA if you mistakenly use the wrong metric. SBA lenders know the difference, and using the wrong one can undermine your loan application.
Industry Multiples and How They Vary
Once you have the right earnings metric, you apply a multiple to arrive at the business value. But multiples vary dramatically by industry, size, growth rate, and risk profile.
Typical SDE Multiples for SBA-Sized Businesses
- Service businesses (low capital): 1.5x – 2.5x SDE
- Retail businesses: 1.8x – 2.8x SDE
- Restaurants and food service: 1.5x – 2.5x SDE
- Manufacturing: 2.5x – 4.0x SDE
- Professional services: 2.0x – 3.5x SDE
- Healthcare practices: 2.5x – 4.0x SDE
- E-commerce / digital: 2.5x – 4.0x SDE
- Construction / trades: 2.0x – 3.0x SDE
What Drives Multiples Higher
- Consistent revenue growth over 3+ years
- Diversified customer base (no single customer dominates)
- Recurring or contractual revenue
- Strong brand recognition and reputation
- Documented processes and systems (less owner-dependent)
- Favorable lease with long remaining term
- Stable, experienced workforce
What Drives Multiples Lower
- Declining revenue or margins
- High customer concentration
- Owner dependency — the business can’t run without the current owner
- Short or unfavorable lease terms
- Industry headwinds or disruption risk
- Deferred maintenance on equipment or facilities
- Key employee turnover risk
Asset-Based vs. Income-Based Valuation
There are two fundamental approaches to business valuation, and understanding both is essential for SBA buyers.
Income-Based Valuation
Income-based valuation focuses on the business’s earning power. This is the most common method for SBA acquisitions because SBA lenders care primarily about cash flow — can the business generate enough income to service the loan?
The basic formula:
Business Value = Earnings Metric (SDE or EBITDA) × Industry Multiple
For example: A landscaping company with $250,000 in SDE, valued at 2.5x, would be priced at $625,000.
Asset-Based Valuation
Asset-based valuation focuses on what the business owns minus what it owes:
Business Value = Total Assets – Total Liabilities
This method is more relevant for:
- Businesses with significant tangible assets (equipment, real estate, inventory)
- Businesses that are not consistently profitable
- Businesses being liquidated
- Manufacturing or distribution businesses with substantial equipment
In practice, most SBA acquisition prices use an income-based approach as the primary method with an asset-based check to ensure you’re not overpaying relative to the tangible assets included.
The Goodwill Question
The difference between the income-based value and the net asset value is goodwill — the intangible value of the business (brand, customer relationships, reputation, systems). In most SBA acquisitions, goodwill represents 50-80% of the purchase price. SBA lenders are comfortable financing goodwill, but the amount needs to be justified by strong, consistent cash flows.
How SBA Lenders Evaluate the Purchase Price
Understanding how your SBA lender will evaluate the purchase price helps you avoid overpaying and strengthens your loan application.
Debt Service Coverage Ratio (DSCR)
This is the single most important metric for SBA lenders. DSCR measures whether the business generates enough cash flow to cover loan payments:
DSCR = Adjusted Cash Flow ÷ Total Annual Debt Service
Most SBA lenders require a minimum DSCR of 1.25x, meaning the business must generate at least $1.25 for every $1.00 in loan payments. Many lenders prefer 1.35x or higher.
If your purchase price pushes the DSCR below the lender’s threshold, one of three things happens:
- The lender declines the deal
- The lender requires a larger down payment
- You need to negotiate a lower purchase price
Third-Party Valuations
For deals over $500,000 (and sometimes lower), many SBA lenders require an independent business valuation. This third-party appraisal provides an objective opinion of the business’s fair market value. If your agreed purchase price significantly exceeds the appraised value, the lender may reduce the loan amount.
Reasonableness Check
Lenders also apply a common-sense test: Is the purchase price reasonable given the industry, size, and risk profile of the business? An auto repair shop selling for 5x SDE will raise eyebrows even if the DSCR technically works.
When a Business Is Overpriced — and How to Negotiate
Sellers almost always have an emotional attachment to their business and often overvalue it. Here are signs you’re looking at an overpriced business and strategies to negotiate effectively.
Signs of an Overpriced Business
- Multiples above industry norms: If similar businesses sell for 2.5x SDE but the seller wants 4x, it’s overpriced.
- Projected earnings justify the price, but historical don’t: SBA lenders underwrite historical performance, not projections.
- “Unreported income” claims: If the seller says “the real numbers are higher than the tax returns show,” walk carefully. SBA lenders won’t count unreported income.
- DSCR below 1.25x at the asking price: If the math doesn’t work for lenders, the price is too high.
- Comparable sales data doesn’t support the price: Research similar businesses that have recently sold in your industry and geography.
Negotiation Strategies
- Lead with data, not opinions: Present your financial analysis, comparable sales data, and DSCR calculations. Numbers are harder to argue with than feelings.
- Use the SBA lender as leverage: “My lender values the business at X based on their underwriting criteria” is a powerful negotiating tool.
- Propose seller financing to bridge the gap: If the seller insists on a higher price, propose more seller financing with extended terms. This shows you’re flexible while protecting your cash flow.
- Negotiate based on due diligence findings: If your due diligence uncovers issues (aging equipment, customer concentration, declining margins), use these to justify a price reduction.
- Consider an earnout: If the seller believes the business will grow, propose an earnout where a portion of the price is contingent on future performance. This aligns incentives and reduces your risk.
- Be willing to walk away: The most powerful negotiation tool is the ability to say no. If the price doesn’t work, there are other businesses for sale.
Putting It All Together: A Pricing Example
Let’s walk through a real-world pricing scenario:
- Business: A commercial cleaning company
- Annual revenue: $1.2 million
- Net income (per tax returns): $120,000
- Owner’s salary: $85,000
- Owner’s benefits: $15,000
- Depreciation: $20,000
- One-time legal expense: $10,000
SDE = $120K + $85K + $15K + $20K + $10K = $250,000
Industry multiple for commercial cleaning: 2.0x – 3.0x SDE
Estimated value range: $500,000 – $750,000
If the business has strong recurring contracts, a diversified client base, and growing revenue, it might warrant the higher end. If it’s owner-dependent with casual customer relationships, the lower end is more appropriate.
Let GoSBA Help You Get the Price Right
Calculating the right acquisition price is both art and science. You need to understand the financial metrics, know your industry’s norms, and structure a deal that satisfies both the seller and your lender.
At GoSBA Loans, our service is completely free to borrowers, and we provide:
- Professional financial projections that help validate the purchase price — valued at $2,500-$5,000, provided at no cost
- Access to 50+ SBA lenders who provide competitive offers for your deal
- Deal structuring expertise to help you negotiate a price that works for everyone
- Over $320 million funded in 2025 — we know what lenders will approve
Contact GoSBA today for a free consultation and let us help you calculate the right price and secure the financing to close your deal.
