Revenue Is Not Value
The first thing to understand about business valuation is that your revenue figure — however impressive — is not a reliable indicator of what your business is worth. Buyers do not buy revenue. They buy the right to receive future profits, adjusted for risk.
A business with $3m in revenue but thin margins, high owner dependency, and no recurring revenue may be worth considerably less than a business with $1m in revenue, strong profitability, contracted clients, and a management team in place. Valuation is fundamentally about earnings quality, not top-line size.
Understanding SDE: Seller Discretionary Earnings
For most small to mid-sized owner-operated businesses in Denver, the primary valuation metric is Seller Discretionary Earnings (SDE). SDE represents the total economic benefit available to a single owner-operator.
SDE is calculated by taking net profit and adding back: the owner's salary and benefits, personal expenses run through the business, one-off or non-recurring costs, depreciation and amortisation, and interest expense.
The result is a figure that represents what a working owner-operator could expect to earn from the business. Buyers then apply a multiple to this figure — typically 2x to 4x for most Denver small businesses — to arrive at a starting valuation.
The specific multiple depends on the size of the business (larger businesses generally attract higher multiples), the sector, growth trends, customer concentration, owner dependency, and the quality and completeness of the financial documentation.
EBITDA for Larger Businesses
For businesses with professional management teams and revenues above $3–5m, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is more commonly used. Unlike SDE, EBITDA does not add back the owner's salary — it assumes a market-rate management team is in place.
EBITDA multiples for mid-market Denver businesses typically range from 3x to 6x or more, depending on sector and growth profile. Businesses with high recurring revenue, strong growth rates, and defensible market positions — particularly in technology, healthcare, and professional services — can command multiples significantly above these ranges.
If your business generates $1m or more in EBITDA, a formal M&A process with institutional buyer involvement may produce significantly better outcomes than a traditional business brokerage process.
What Drives Your Multiple Up or Down
Factors That Increase Value
- +Strong recurring revenue or contracted income
- +Diversified customer base (no single customer {">"} 15–20%)
- +Clean, well-documented 3-year financials
- +Management team capable of running without the owner
- +Consistent growth in revenue and profitability
- +Proprietary systems, IP, or competitive advantages
- +Transferable customer relationships
Factors That Reduce Value
- −High owner dependency (key relationships, skills, or decisions)
- −Customer concentration risk
- −Inconsistent or declining profitability
- −Poorly documented or inconsistent financials
- −Short lease term or property/location risk
- −Single-source supplier dependency
- −Unresolved legal or compliance matters
Why Recurring Revenue Matters So Much
Buyers pay premium multiples for predictable, recurring revenue because it reduces the risk associated with the acquisition. A business where 70% of revenue is contracted or subscription-based is fundamentally less risky than a business where every pound or dollar of revenue has to be re-won each year.
In the Denver market, this is particularly relevant for businesses in technology, managed services, healthcare, professional services with retainer agreements, and any subscription or SaaS-type model. If your business has recurring revenue, making sure it is clearly documented and highlighted will strengthen your valuation.
Why Online Valuation Calculators Are Limited
A Google search for "business valuation calculator" will return dozens of tools that invite you to enter revenue, profit, and sector to produce an instant valuation figure. These tools are of limited practical value for several reasons.
First, they apply generic multiples without accounting for the specific risk profile of your business. Second, they cannot assess the quality of your financials, the strength of your customer relationships, or the depth of your management team. Third, they typically do not reflect current buyer demand or market conditions in your specific sector.
An online calculator might tell you your business is worth $2m. An informed buyer with access to your financials might offer $1.2m or $2.8m depending on what they find. The only way to understand your true market value is through a proper review with an experienced advisor.
Start With a Realistic Number
Understanding what your business is worth — and what is driving that value — is the essential first step. Request a confidential valuation conversation to explore where your business stands.