If you're going to trust a number that informs decisions about your business, you should know how it was calculated. This page walks through the methodology Cervit's agent uses: how we get from your tax return to a real SDE, how we determine which multiple range applies, and which factors push you to the top or bottom of that range.
The methodology follows the same logic that brokers, M&A advisors, and credentialed business appraisers use. The agent does it in 5 minutes instead of 5 weeks, and it costs nothing instead of $5,000. The tradeoffs are real, and we cover those at the end.
Step One: Calculating Your SDE
SDE stands for Seller's Discretionary Earnings. It's the standard cash flow measure for valuing small, owner-operated businesses. It answers the question a buyer is actually asking: how much money will this business put in my pocket each year if I run it the way you've been running it?
The formula:
SDE = Net profit + Owner compensation + Owner benefits + Interest + Depreciation + Amortization + One-time expenses + Adjustments for non-arm's-length transactions
Working through it:
Net profit.
The starting point is your bottom line from the most recent full tax year, before any owner additions.
Owner compensation.
Add back what you pay yourself in salary, draws, or distributions. The buyer will replace this with their own compensation, so it's not a real ongoing cost of the business.
Owner benefits and perks.
Health insurance, retirement contributions, life insurance premiums, vehicle and fuel, cell phone, and any personal expenses run through the business. A buyer doesn't inherit your benefits package.
Interest expense.
Add back interest on business loans and lines of credit. The new owner's financing structure will be different from yours.
Depreciation and amortization.
Non-cash expenses. They reduce your taxable income but not your actual cash flow.
One-time expenses.
A major equipment purchase that won't repeat, a legal matter, a renovation, a one-time consulting engagement. Anything non-recurring gets added back.
Non-arm's-length adjustments.
If you own the building and pay yourself above-market rent, the spread is an add-back. If a family member is on payroll for $40,000 doing $20,000 of actual work, the difference is an add-back. The agent normalizes these so your SDE reflects what the business would actually generate under a third-party buyer.
The result is a real, defensible number. It's the same SDE a broker would calculate, the same number a buyer would underwrite, and the same number that determines what your business is worth.
Step Two: When EBITDA Replaces SDE
For larger businesses, buyers shift from SDE to EBITDA. The threshold is roughly $5M in revenue, though it varies by industry and deal type.
The reason is structural. SDE assumes one owner-operator running the business. EBITDA assumes a professional management team that stays in place after the sale. At a certain size, the buyer isn't going to operate the business themselves; they're going to keep your team and oversee from above. That changes the math.
The EBITDA formula:
EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization + Adjustments
Notice what's missing: owner compensation. EBITDA assumes the owner's compensation stays in the business as an operating cost (the new owner will pay a CEO or general manager), so it doesn't get added back.
For businesses in the gray zone (roughly $3M to $7M in revenue), the agent calculates both and tells you which applies. Buyers in your size range will likely look at both numbers, and knowing both lets you have a more informed conversation with brokers and advisors.
Step Three: Applying the Right Multiple
Multiples aren't pulled from thin air. They're derived from actual transaction data: thousands of real businesses sold to real buyers in the same industry, at similar sizes, in recent years.
For each industry Cervit covers, we anchor to current market multiple ranges from sources like BizBuySell's Insight Report, IBBA market pulse data, and published industry M&A reports. The ranges are then adjusted by size, since smaller businesses trade at lower multiples than larger ones in the same industry.
That gives you a baseline range. From there, four risk factors move you within the range:
Recurring revenue.
The percentage of your revenue that comes from contracts, retainers, or maintenance agreements. Higher recurring revenue moves you up the range. In service industries, this is often the single largest factor.
Customer concentration.
Whether any single customer represents an outsized share of revenue. As a rule of thumb, any customer above 20% of revenue is flagged as concentration risk. Lower concentration moves you up.
Owner dependency.
How much of the business runs through you personally. A business that operates without you for 90 days moves up. A business that grinds to a halt without you moves down.
Growth trajectory.
Whether revenue has been growing, flat, or declining over the last two years. Growth moves you up. Decline moves you down meaningfully.
The agent assesses each of these and produces a multiple range that reflects where your specific business actually sits, not just where the industry average sits.
What This Tool Is Built For
Cervit is designed for one specific job: giving owners a real, defensible read on what their business is worth, fast and free, so they can make better decisions about the business now and the eventual exit.
It's good for:
- Knowing your number.Most owners don't have a current valuation. The agent gives you one in 5 minutes.
- Understanding your levers. Which factors are pushing your number up. Which are holding it down. What to work on if you want a higher number.
- Exit planning.Whether you're thinking about selling in 18 months or 10 years, knowing your number changes how you run the business now.
- Pre-broker conversations. Walking into a broker meeting with an informed read on your number, rather than relying entirely on theirs.
- Sanity-checking offers. If a buyer approaches you, the agent gives you a fast read on whether the offer is in the ballpark.
It's not built for:
- Active transaction work.Once you're in a real deal, you need a broker or M&A advisor working with your specific buyer, your specific deal structure, and your specific financials.
- Litigation, divorce, partner buyouts, or estate planning.These require a formal valuation from a credentialed appraiser. The work product needs to stand up in court or in front of the IRS, and Cervit's output is not designed for that.
- Lender requirements.SBA loans and bank financing typically require an independent third-party valuation. Cervit isn't a substitute.
When You Need More Than This
There are situations where you should pay for a formal valuation instead of, or in addition to, using Cervit. Naming them honestly:
- Active sale process.Once you're in negotiations with a real buyer, hire a broker or M&A advisor.
- Partner buyouts or shareholder disputes. You need a formal valuation that both sides agree to use.
- Divorce or other litigation. Courts require valuations from credentialed appraisers.
- Estate planning and gift tax. The IRS requires formal valuations for transfers above certain thresholds.
- Employee stock ownership plans (ESOPs). Strict regulatory requirements apply.
- Buy-sell agreements. Most well-drafted agreements specify a credentialed appraiser as the methodology.
A formal valuation typically costs $5,000 to $15,000 or more for a small business. The credentials to look for are CVA (Certified Valuation Analyst), ABV (Accredited in Business Valuation), or ASA (Accredited Senior Appraiser).
Cervit complements this. Most owners use the agent first to know their number and understand their levers, then engage a professional when the situation requires it.
About the Methodology
Cervit was built by Joshua Ross, an entrepreneur who built and sold a technology services business and now teaches entrepreneurship at a business school in Denver. The methodology comes from inside the problem: the realization that most small business owners go their entire careers without knowing what their business is actually worth, and that getting a real answer typically costs thousands of dollars and weeks of work most owners can't afford.
Cervit exists to change that. The agent runs the same valuation logic that brokers and M&A advisors use, in 5 minutes, for free. Owners get a real number, a clear read on their levers, and the option to engage a professional when they need one.
The methodology is reviewed and updated as market conditions change. Multiple ranges are anchored to current transaction data from authoritative industry sources, including BizBuySell's quarterly Insight Report, the IBBA market pulse, and published M&A reports from investment banks and industry analysts.
If you spot something on this page that needs updating, or you have a question about how the agent values a specific situation, email us. We read everything.