If you’ve ever Googled “how to value a small business,” you’ve probably seen a dozen different formulas floating around. Five times revenue. Eight times revenue. Ten times revenue. Pick a number, multiply, and boom—you’ve got your business value.

Except that’s not how any of this actually works.

The biggest valuation mistake small business owners make is confusing revenue with value. They sound like they should be the same thing, but they’re not even close. Revenue is the money coming in. Value is what a buyer will actually pay. And there’s a massive gap between the two.

Here’s why: two businesses can have identical revenue and wildly different values. Imagine two $2 million revenue companies sitting side by side. Company A runs lean, manages costs carefully, and drops half a million dollars to the bottom line. Company B, meanwhile, generates the same $2M in revenue but spends every penny on expenses, leaving only $100K in profit.

If you sold Company A, you’d be looking at roughly $1.5 million. Company B? Maybe $300K. Same revenue, same market, completely different outcomes. And that’s because buyers don’t care about your top line—they care about what you actually keep.

This is where SDE comes in. SDE (Seller’s Discretionary Earnings) is the profit a buyer can actually use to pay themselves, pay down a loan, or reinvest. It’s the earning power of the business, and it’s what determines value. Small businesses typically sell for 2 to 4 times SDE, not revenue multiples. If your business throws off $500K in SDE, you’re looking at a $1 to $2 million valuation, not $10 to $20 million based on revenue.

The old saying goes: “Revenue is vanity, earnings are sanity.” That’s not just clever—it’s the truth of how business sales work. A buyer will do the exact same math you should be doing right now. They’ll take your actual documented earnings, adjust for one-off expenses and owner perks, and calculate the real profit engine they’re buying.

So before you anchor yourself to some arbitrary revenue multiple, do yourself a favor: calculate your SDE. Add back discretionary expenses that a new owner wouldn’t need to make. Look at what the business actually produces in profit. That’s the number that matters when it comes time to find a buyer.

Your business is worth what it earns, not what it sells.

Ready to understand your actual business value? Owners Club helps you recast your financials, calculate true SDE, and position your business for the valuation it deserves.