The short answer
Value starts with earnings. It doesn’t end there.
A common starting framework is normalized earnings multiplied by a market-supported multiple. That produces an indicated enterprise value. Subtract interest-bearing debt and add any excess cash that transfers to estimate equity value. The actual result depends on financial evidence, market data, buyer terms, and what is included in the transaction.
Normalize before multiplying
A weak add-back gets counted twice: in earnings, then in the multiple.
Start with reported EBITDA or SDE, then add only expenses that are genuinely nonrecurring, discretionary, owner-specific, and supportable. Subtract recurring costs a buyer will need to incur, including market-rate replacement compensation when it is missing from the earnings measure.
Keep an evidence file for every adjustment. General-ledger detail, invoices, payroll records, contracts, and a concise business explanation are more useful than a spreadsheet label. A buyer's quality-of-earnings work may reject adjustments that cannot be tied to evidence.
EBITDA versus SDE
Use an earnings measure that matches the size and operating model.
EBITDA is earnings before interest, taxes, depreciation, and amortization. Buyers often use normalized EBITDA when the company is expected to support professional management independently of one owner.
Seller's discretionary earnings, or SDE, typically adds one owner's compensation and selected benefits to operating earnings. It is more common for smaller owner-operated companies. Applying an EBITDA multiple to SDE—or the reverse—can materially distort the range.
What changes the multiple
A multiple is a buyer’s bet on risk and future cash flow.
- Revenue quality and concentration.Repeatability, contracts, retention, and dependence on a few customers.
- Owner dependence.Whether relationships, sales, expertise, and decisions can transfer beyond the owner.
- Management and systems.The company's ability to operate, report, and grow without heroic intervention.
- Growth, margins, and capital needs.Historical evidence, credible forecasts, cyclicality, working capital, and required reinvestment.
- Market and deal facts.Industry transactions, buyer competition, strategic fit, structure, financing, and risk allocation.
Three different numbers
Enterprise value, equity value, net proceeds: three different numbers.
Enterprise value reflects the operating business before considering how it is financed. Equity value generally adjusts enterprise value for debt, cash, and other agreed items. Net proceeds are what may reach the owner after transaction structure, working-capital adjustments, debt, fees, taxes, escrows, indemnities, and contingent value.
Why the sensitivity table matters
A range should show which assumption is doing the work.
The sensitivity table changes normalized earnings by ten percent and applies the lower, midpoint, and upper selected multiples. It does not predict a buyer's offer. It shows how quickly the indicated equity value moves when earnings or the multiple changes—before taxes, fees, escrows, earnouts, rollover equity, or other deal terms.