The Gap Between Your Number and Their Number
You've got a number in your head. It's the one you tell your spouse over dinner, the one you've been working toward for years. Maybe it's based on what your buddy sold his business for, or what some online calculator spit out after you plugged in last year's revenue.
Here's the reality: that number and the one a buyer will actually wire into your account are often two very different things.
The difference isn't about negotiation tactics or finding the "right" buyer. It's about understanding what buyers and their lenders actually verify before they commit capital. And if you wait until you're in due diligence to figure this out, you've already lost negotiating leverage.
EBITDA vs. SDE: The Language Barrier
Most owners operate their businesses using Seller's Discretionary Earnings (SDE). This calculation takes your net profit and adds back your salary, personal expenses run through the business, one-time costs, and interest, taxes, depreciation, and amortization.
SDE works well for smaller businesses because it shows what an owner-operator actually takes home. If your business generates $500K in SDE and you're hands-on in operations, that number means something to you.
But here's where it gets complicated: buyers who need institutional financing don't use SDE. They use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
EBITDA assumes the business runs with a professional management team in place. Your salary gets replaced with market-rate compensation for a general manager. Those personal expenses that got added back in SDE? They stay out. The boat you wrote off last year? Not coming back into earnings.
For most trades businesses, EBITDA runs 20-40% lower than SDE. If your business shows $500K in SDE but requires a $120K manager to replace you, your EBITDA just dropped to $380K. That gap directly impacts your multiple and your final purchase price.
You need to know which metric your buyer will use before you set expectations. Private equity groups and strategic buyers use EBITDA. Individual buyers using SBA loans often use SDE. Understanding this distinction early prevents sticker shock later.
The SBA Lender: The Third Party at Your Negotiation Table
You can agree to any purchase price you want with a buyer. But if their lender won't fund it, the deal dies.
SBA lenders follow strict guidelines when they underwrite acquisition loans. They'll verify cash flow, debt service coverage, working capital, and whether the business can support both the loan payment and a reasonable salary for the new owner.
If the lender says no, the buyer can't close: no matter how motivated they are.
Here's what SBA lenders actually scrutinize:
- Debt Service Coverage Ratio (DSCR): Most lenders want to see 1.5x coverage, meaning your business needs to generate $1.50 in cash flow for every $1.00 in annual debt payments
- Three years of tax returns: They're looking for consistent or growing earnings, not a one-year spike
- Personal expenses added back: They'll approve some add-backs (your salary, personal vehicle), but they won't accept aggressive recharacterizations
- Customer concentration: If one customer represents more than 25% of revenue, expect additional scrutiny or loan structure changes
- Owner transition plan: They want to see how you'll transfer relationships, systems, and operational knowledge
The lender's job isn't to help you maximize your sale price. Their job is to protect their loan. They'll stress-test your financials, question your add-backs, and discount projections that aren't supported by historical performance.
You don't negotiate with the lender directly, but their underwriting standards shape what buyers can actually offer. If your asking price pushes the DSCR below acceptable levels, buyers will either walk or restructure the deal with seller financing to bridge the gap.
Working Capital: The Deal Cost Nobody Mentions
Purchase price gets all the attention. Working capital gets ignored until closing: and then it becomes the source of most disputes.
Working capital is the cash your business needs to operate day-to-day. It's the money tied up in accounts receivable, inventory, prepaid expenses, minus accounts payable. Buyers expect you to deliver the business with enough working capital to keep it running smoothly after you leave.
Here's where deals blow up: working capital stays with the business at closing. It doesn't come out of the purchase price: it's in addition to it.
If your business normally operates with $150K in working capital and you've been running it lean at $75K to maximize cash out before the sale, you'll need to inject $75K back in at closing. Or the buyer will reduce the purchase price by that amount.
Most buyers calculate a working capital "peg" based on your trailing twelve months of operations. They'll measure what you typically keep in AR, inventory, and cash, then require you to deliver the business at that level.
The math works like this:
- Purchase Price: $2,000,000
- Required Working Capital: $150,000
- Actual Working Capital at Closing: $100,000
- Working Capital Shortfall: $50,000
- Net Cash to Seller: $1,950,000
You didn't lose $50K in negotiation. You just had to deliver what the business actually needs to operate. But if you weren't expecting this requirement, that $50K shortage feels like a last-minute price cut.
You need to calculate your normalized working capital before you go to market. Don't strip cash from the business in the months leading up to a sale. Buyers and their lenders will catch it, and you'll write a check at closing to true it up.
Market Comparables vs. Your Specific Business Performance
You've seen the headlines: "HVAC Companies Selling for 6x EBITDA" or "Electrical Contractors Commanding Premium Multiples." Those numbers represent market ranges: not guarantees for your business.
Buyers don't pay you based on what someone else's company sold for. They pay based on what your business demonstrates through verified performance, systems, and growth potential.
Here's what actually moves your multiple:
- Revenue concentration: Diversified revenue across multiple customers and project types supports higher valuations than dependency on two large contracts
- Recurring revenue: Service contracts, preventative maintenance agreements, and multi-year commitments reduce buyer risk
- Documented systems: Written procedures, training materials, and operational manuals prove the business runs without you
- Management team: A superintendent, project manager, or operations lead who can run jobs without your oversight increases bankability
- Gross margin consistency: Stable margins across multiple years matter more than one high-profit year
- Growth trajectory: Three years of revenue and profit growth signals market demand and competitive positioning
Your neighbor might have sold his mechanical contracting business for 5.5x EBITDA. But if his business had $3M in revenue across 40 commercial clients and yours has $3M in revenue from three large GCs, his multiple doesn't apply to your situation.
Lenders verify these factors independently. They'll review customer lists, contract terms, job costing reports, and operational structure. They're not comparing your business to market comps: they're assessing whether your business can support the debt they're being asked to underwrite.
The Reality Check You Need Before Marketing
Most owners don't discover the gap between their number and market reality until after they've signed an NDA with a buyer and entered due diligence. At that point, you're negotiating from a position of disappointment rather than confidence.
Here's what you need to verify before you take your business to market:
- Run your financials through both SDE and EBITDA calculations to understand which metric your likely buyer pool will use
- Calculate your normalized working capital requirement and confirm you can deliver it at closing without reducing your net proceeds
- Stress-test your cash flow against SBA lending standards (1.5x DSCR minimum) to see what purchase price the business can actually support
- Document your systems and management structure to demonstrate operational independence from your daily involvement
- Review your customer concentration and contract terms to identify risk factors that will trigger lender scrutiny or multiple adjustments
You can't change market fundamentals, but you can align your expectations with how buyers and lenders actually assess value. The businesses that sell at top-of-market multiples aren't lucky: they've prepared their operations and financials to withstand institutional scrutiny.
If you're serious about understanding what your business will actually sell for (not what you hope it might), start with verification rather than valuation. Get your financials reviewed by someone who understands both buyer and lender perspectives. Identify the gaps between your current state and what the market will actually support. Then decide whether you're willing to close those gaps or adjust your expectations.
The number in your head matters. But the number that clears a lender's underwriting desk matters more.