🔍 Business Acquisition Calculator

📋 Deal Parameters

📚 How to Analyze a Business Acquisition

Buying a business is one of the largest financial decisions an entrepreneur can make. Unlike startup investing, you are paying for proven cash flow — but you must verify that cash flow is real, sustainable, and transferable without the current owner. Here is how professional buyers analyze deals.

Step 1: Verify the SDE

Seller's Discretionary Earnings (SDE) is the single most important number. It represents the total economic benefit to a full-time owner-operator: net profit + owner salary + owner benefits + depreciation/amortization + one-time expenses + personal expenses run through the business. Never trust the SDE figure without reviewing 3 years of tax returns, P&L statements, and bank statements. Add-backs must be defensible — one-time items only, not recurring costs the seller calls "one-time."

Step 2: Benchmark the Multiple

The SDE multiple tells you how many years of earnings you are paying for the business. Main Street businesses (under $5M revenue) typically trade at 1.5–4.0x SDE. The multiple is driven by: industry (SaaS commands 3–6x; restaurants trade at 1.5–2.8x), revenue growth trend, owner dependence, customer concentration, lease terms, and strength of the management team. A business where the owner IS the product is worth less — it cannot be sold; it can only be replaced.

Step 3: Model the Debt Service

Most buyers use SBA 7(a) financing with 10% down and a 10-year amortization. At current rates (approximately 11.5%), the annual debt service on a $500,000 acquisition with 90% financing is about $68,000. If the SDE is $140,000, that leaves $72,000 pre-tax income for the buyer in Year 1 — a DSCR of 2.06x. The SBA requires a DSCR of at least 1.25x to approve the loan. Lenders want to see the business can service the debt even if SDE falls 20%.

Step 4: Calculate Your IRR

Internal Rate of Return (IRR) measures your return on the equity invested (down payment + closing costs + working capital). A typical leveraged acquisition targeting 20–35% IRR over 5 years requires: (1) positive cash flow from Day 1, (2) SDE growth of 3–5% annually, and (3) a clean exit at a similar multiple to purchase. If the business has declining revenue, back-of-envelope IRR calculations are optimistic — your real IRR may be negative.

Step 5: Stress Test the Break-Even

Before signing a LOI, ask: "What is the maximum SDE decline I can absorb before I cannot service my debt?" This is the break-even SDE decline. Conservative buyers require at least 25–30% cushion. If the break-even decline is 10%, one bad year could make you insolvent. Restaurants, cyclical businesses, and businesses with high customer concentration have the most risk here.

5 Red Flags in Business Acquisitions

• Owner IS the business: If the seller handles all client relationships, the business is not transferable without significant revenue loss.
• Customer concentration: If one customer represents >20% of revenue, losing them post-acquisition is existential.
• Declining revenue: Three years of declining revenue means the trend matters more than the multiple. Investigate the cause before proceeding.
• Short lease or unfavorable lease: Buying a restaurant with 18 months left on the lease is extremely risky. Location-dependent businesses need long leases with transferable rights.
• Undisclosed liabilities: Tax liens, pending lawsuits, and environmental issues may not appear in the marketing materials. Always run lien searches and review QOE (Quality of Earnings) reports.

SDE Multiple Benchmarks by Industry (2025)

Source: BizBuySell Insight Report Q3 2025, IBA Market Pulse 2025. Multiples reflect Main Street businesses with $250K–$5M revenue. Lower-end applies to distressed or highly owner-dependent businesses; upper-end applies to businesses with recurring revenue, strong management, and growth trajectory.

More Free Calculators