From SDE to Valuation: How to Apply Industry Multiples

In our previous guide, we walked through calculating Seller's Discretionary Earnings for Sunny Plaza Laundromat, arriving at an SDE of $151,500 for 2025. But a single year's SDE doesn't tell the whole story—and SDE alone isn't the only metric that matters.

In this guide, we'll show you how professional valuations work: using weighted averages across multiple years, applying industry-specific multiples, and combining different valuation methods to arrive at a defensible estimate of what a business is actually worth.

Why Weighted Averages Matter

Business performance fluctuates year to year. A single exceptional year—or a single bad one—can distort your valuation if you rely on it alone.

Here's Sunny Plaza's SDE over four years:

If we valued the business using only 2025, we'd get one number. Using only 2022, we'd get a much lower one. Neither fully represents the business.

The solution is a weighted average that emphasizes recent performance while acknowledging the track record:

Why this weighting? The most recent year carries the most weight because it's the best predictor of near-term performance. But we don't ignore history—a business that earned $150,000 last year after three years of $150,000 is more reliable than one that earned $150,000 after three years of $80,000.

We apply the same logic to revenue:

Now we have two base figures to work with: $137,860 in weighted SDE and $277,000 in weighted revenue.

Understanding Industry Multiples

A "multiple" is simply a multiplier applied to earnings or revenue to estimate total business value. If a business earns $100,000 in SDE and trades at a 3.0x multiple, it's worth approximately $300,000.

But where do multiples come from?

Industry multiples are derived from actual transaction data—what buyers have historically paid for similar businesses. Different industries command different multiples based on factors like growth potential, capital requirements, risk profile, and buyer demand.

For laundromats, the base SDE multiple typically falls in the 2.5x to 4.0x range. Sunny Plaza's industry baseline is 3.56x.

But that's just the starting point.

Adjusting the Multiple for Business-Specific Factors

Not every laundromat is created equal. Location alone can make an enormous difference—a laundromat situated near apartment buildings without in-unit laundry facilities will see consistently higher traffic than one in a neighborhood where most residents have washers and dryers at home. The same applies to factors like owner involvement, financial trends, and customer concentration.

Five factors typically adjust the base multiple:

Combined adjustment: 110%

Applying this to the base multiple:

This adjusted multiple reflects Sunny Plaza's specific strengths. A laundromat with declining revenue and heavy owner involvement would see adjustments in the opposite direction.

The SDE Valuation

Now we apply the adjusted multiple to our weighted SDE:

This is what the business is worth based on its earnings power.

The Revenue Valuation

For laundromats, the revenue multiple is approximately 1.44x. We apply this to our weighted revenue:

This is what the business is worth based on its top-line sales. Notice it's lower than the SDE valuation—that's expected, since revenue multiples don't account for how efficiently the business converts sales to profit.

Why Using Multiple Metrics Matters

Many business valuations stop at a single metric. Some use only revenue. Others attempt SDE but calculate it incorrectly—missing key add-backs or failing to account for costs a new owner will face. Either way, relying on one number creates blind spots.

Consider two businesses:

• Business A: $500,000 revenue, $100,000 SDE (20% margin)
• Business B: $200,000 revenue, $100,000 SDE (50% margin)

Using only SDE, these businesses appear equal. But they're not. Business A has significantly more revenue—more customer transactions, more market presence, more potential for margin improvement. A buyer might see more upside in Business A even though current earnings are identical.

Revenue captures this dimension. Revenue-based valuations are typically more conservative (because they don't account for profitability), but they provide a valuable second perspective.

Combining the Two Valuations

Here's the key insight: using multiple metrics produces a more holistic valuation than relying on any single number.

Each metric captures something different:

• SDE measures what the owner actually takes home—the earnings power
• Revenue measures the scale of the business—the market presence

By combining them, we get a more complete picture of what a business is truly worth.

The standard weighting is 70% SDE / 30% Revenue. Why this split? SDE is the primary driver of small business value—it's what the buyer is actually purchasing. But revenue provides a meaningful sanity check and captures value that pure earnings might miss.

The Final Valuation Range

No valuation is exact. Market conditions, buyer motivation, negotiation skill, and timing all affect the final sale price. A responsible valuation provides a range, not a single number.

For Sunny Plaza Laundromat:

This range (±7% from the calculated estimate) accounts for normal market variability. The actual sale price will depend on factors like buyer competition, financing terms, and how well the business presents during due diligence.

What This Means for the Seller

Let's step back and see the full picture.

We started with net income of $72,400 in 2025. An owner looking at their tax return might think that's what their business earns—and that it's not worth much.

But after proper normalization:

• Net income became $151,500 in SDE (most recent year)
• Weighted across four years: $137,860
• Applied to industry multiples with adjustments: $498,780 median value

That's a business worth roughly half a million dollars—nearly seven times the net income figure on the tax return.

This is why proper valuation methodology matters. It's not about inflating numbers. It's about accurately representing what a buyer is actually purchasing: the full financial benefit of owning and operating the business.

Summary: The Complete Valuation Flow

1. Calculate SDE for each year (net income + add-backs − anticipated new owner costs)
2. Weight the years (40% / 30% / 20% / 10%) for both SDE and Revenue
3. Start with base industry multiples (SDE and Revenue)
4. Adjust multiples for business-specific factors (±5% per factor)
5. Apply multiples to weighted averages
6. Combine valuations (70% SDE / 30% Revenue)
7. Present a range (±7% from calculated estimate)

This methodology isn't arbitrary. It's how professional brokers and appraisers approach small business valuation—multiple metrics, weighted history, adjusted multiples, combined perspectives.