🤝 Service Business Valuation Calculator

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📚 Valuing a Service Business: Key Factors

Service businesses are valued primarily on SDE (Seller's Discretionary Earnings), but the multiple applied varies enormously based on business quality. The same $200,000 SDE can be worth $300,000 or $700,000 depending on how the business is structured. Understanding the key value drivers helps you prepare for a better exit.

Owner Dependence: The #1 Discount Factor

If you are working 60+ hours per week handling client work, sales, and operations, buyers face a transition risk: will clients stay when you leave? Reducing your hours below 30 per week by hiring account managers and documenting processes is the highest-ROI action you can take before selling. Every 10-hour reduction in your weekly involvement can add 0.2-0.3x to your SDE multiple.

Client Concentration

A single client representing more than 20% of revenue triggers risk flags in due diligence. Buyers will either reduce the purchase price, require an earnout tied to that client's retention, or both. Diversifying to where your largest client is below 15% of revenue is a critical pre-sale milestone for professional services businesses.

Recurring vs. Project Revenue

Monthly retainers, annual contracts, and subscription-based service delivery create predictable revenue that buyers can model. Project-based revenue is unpredictable and requires constant sales effort, which reduces the multiple. Converting even 30-40% of revenue to recurring retainers can increase your SDE multiple by 0.25-0.5x.

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