Calculating Seller's Participation into Valuation

April 02, 2025

by a searcher from Williams College in Cleveland, OH, USA

Hello Searchfunder Community,
I am curious as to how fellow searchers are valuing small manufacturing businesses when (1) the seller is a full-time, active participant in the company and (2) the business is sub $3M revenue. I'm getting a lot of brokers that propose EBITDA numbers with the seller's salary as an "add back" while proposing a sale price with multiples in the 4-5x range. From my limited perspective, I thought brokers and other professional valuators would include a seller's salary as a rightful expense (as long as it was market rate), that would not contribute to EBITDA. Are brokers damaging sellers' expectations of a valid offer from buyers or am I just too new to this world and need to up my offer amounts? Would welcome thoughts!

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Reply by a searcher
in Philadelphia, PA, USA

For what I've seen so far, I've found common that for businesses under $5M revenue, the sale price is almost always a multiple of SDE, and, for SDE, brokers do actually add back business salary and all possible benefits. This of course creates a higher price, but it seems to be the common practice. I would say, the relevant aspect for me is:
1. Understand that a common multiple is###-###-#### SDE including owner salary, and addbacks
2. Seeing this multiple, you should have as "available" cash flow the SDE value which you could use to pay youself, a manager (if applicable), and debt. Hence, it's very relevant to understand if you're looking to operate. Knowing also that, if you're looking for a business with an operator instead, it could likely be that it's a better structured business, which would probably not be under $5M revenue, and will likely have a higher price multiple than expected, because, that provides A LOT of value.
3. Check the debt service coverage ratio (DSCR) of your SDE vs debt, and understand if it's something that works for you, according to the loan you would get, and to the payment you wish to receive.
4. During the initial period, you can only do a surface quick review of addbacks, but you got to pretty much trust it unless it's evidently false numbers, in which case, you would of course walk away. The real moment when you would potentially review the addbacks with high accuracy, is during operational, and financial due diligence, with the help of an expert accountant. Here you can assert your DSCR assumptions and see if you would really be comfortable with it.

That's my 2 cents, I'm far far from being an expert, so, don't trust this blindly, rather analyze it and see if it makes sense for you

Would also love to hear different/alternate thoughts from anyone

Reply by an intermediary
from Rochester Institute of Technology in Toronto, ON, Canada

Hi Carla. The smaller businesses are often sold on multiples of SDE, but the actual multiple should reflect the fact that this is an SDE and not EBITDA. So for the same business, the multiple of SDE would be smaller than the multiple of EBITDA. It's quite possible that if price is too high, and it's quite possible that it's a seller directed asking price, because oftentimes sellers have unrealistic expectations and the broker has just accepted it, or it's quite possible that the broker is misguided. What I would do in your situation is ask the broker, how did you come up with this valuation and see what they say, and then you can offer your point of view and why the valuation is what it is. In the end, if someone else offers them asking price, and you think it's overpriced, you will walk away. If it is overpriced and no one offers them, then they would be faced with lower offers and the seller might in the end accept where the market is.

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