How Small Businesses Are Valued: SDE vs EBITDA, and What a Minority Stake Is Worth

How do investors value a small business?

Most valuation conversations start with one of two numbers: Seller's Discretionary Earnings (SDE) or EBITDA. Both are ways of asking the same question — what does this business actually earn, once you strip out the noise? The one our members use depends on the size of the company and how it's run. Neither number is a final price. Both are a starting point for a conversation.

If a valuation question is the reason you haven't picked up the phone yet, that's normal. Owners we talk to almost always want a straight answer before they'll go further. This guide gives you one.

Why do SDE and EBITDA give different numbers?

SDE adds back the owner's salary, personal expenses run through the business, and one-off costs. It answers: what would this business generate for a single owner-operator who works in it full time? SDE is the standard for smaller, owner-run companies where the owner's labour is part of the value.

EBITDA strips out interest, tax, depreciation, and amortization, but it does not add back a market-rate owner's salary. It assumes the business can run with a paid management layer in place, whether that's you, a hired general manager, or a successor. EBITDA becomes the more common measuring stick once a company has grown past the point where one person's daily involvement is the main driver of profit.

Neither figure includes a multiple yet. The multiple — how many times SDE or EBITDA the business is worth — depends on growth trend, customer concentration, contracts, equipment condition, and how replaceable the owner is. Two companies with identical SDE can carry different multiples for reasons that have nothing to do with last year's sales.

What is a minority discount, and does it always apply?

A minority discount is a reduction applied to the value of a stake that doesn't carry control. The logic: a slice of a company you don't control is usually worth less per dollar of earnings than the whole company would be, because the holder can't force decisions on sale, distributions, or direction.

That said, a minority discount is not automatic, and it's not always the right frame. If our members are taking a minority position alongside you as an active owner, and the arrangement gives you continued upside and a working relationship rather than a passive slice of paper, the discount conversation looks different than it would for an outside financial buyer taking a silent stake. Every deal our members structure follows the specific situation — sometimes that means a minority position, sometimes a majority one, depending on what you need and what the business calls for. Nobody should assume in advance which one applies to their company, or that keeping day-to-day control is guaranteed either way.

If your goal is to bring in capital or a partner without walking away from the business entirely, our resource on succession without selling 100% covers how owners think through that decision before any numbers get discussed.

How does company size change the valuation method?

Company size changes both the method and what gets scrutinized.

• Pre-revenue and under $500K: Valuation leans heavily on the owner, the customer list, and near-term contracts. SDE is standard, and the multiple is usually modest because the business hasn't proven it can run without the founder.
• $500K – $1M and $1M – $3M: SDE is still common, but buyers start asking harder questions about customer concentration and whether the business depends on one or two relationships.
• $3M – $10M: This is often where the conversation shifts toward EBITDA, particularly if there's already a management layer below the owner.
• $10M – $25M and over $25M: EBITDA is standard. At this size, the discussion moves toward normalized earnings, working capital, and how cleanly the numbers hold up under closer review.

Our members write cheques from $50,000 to $5,000,000 CAD per company, working alongside other members on larger amounts. The how it works page explains how that group process runs from first call to close.

Does the industry change how a business gets valued?

Yes, and it changes what a valuation conversation focuses on more than it changes the formula.

Manufacturing and automotive supply businesses get evaluated on equipment condition, tier position in the supply chain, and how concentrated the customer base is. Pharmaceutical and regulated manufacturing companies carry extra weight on compliance history and how transferable regulatory approvals are. Construction and trades businesses are judged on backlog, bonding capacity, and whether the work is repeatable or project-by-project. Energy and utility services get looked at through contract length and recurring revenue. Business and industrial services valuations lean on client retention and how sticky the relationships are without the owner in the room. Distribution and logistics businesses get assessed on margin stability and supplier terms.

Whatever sector you're in — and our members look at businesses outside this list too — the underlying question is the same: how much of this company's earnings depend on the owner personally, and how much is built into the business itself?

What does a fair valuation conversation look like at the first call?

It should feel like a conversation, not an audit. On a first call, our members typically want to understand your numbers as you understand them — not push a number on you before they've asked a single question. That means walking through recent financials, understanding what's driving growth or softness, and getting a sense of what you actually want from a deal, whether that's partial liquidity, a transition plan, or capital to grow.

You won't get a binding number on the first call. Nobody should give you one. What you should get is a straight read on whether the size and shape of your business fits what our members typically look at, and what information they'd need to go further.

Because our members are operators themselves, not just financial buyers, the conversation often includes questions a pure financial investor wouldn't think to ask — about how the business actually runs day to day. Our page on what an operator-investor is explains that difference in more detail.

What happens after the valuation discussion?

If the fit looks right, the next step is usually a deeper look at financials, followed by a discussion of structure — how much capital, what stake, what role you keep. That structure gets built around your business and your goals, not applied from a template. Southwestern Ontario owners can also see how this plays out locally through our Windsor-Essex region page.

If you're ready to have that first conversation, you can start on the apply page. There's no cost and no obligation to move forward.

A note on Canadian securities law Blue Ring Venture Capital is a group of individual operator-investors. Nothing on this page is an offer or solicitation to buy or sell securities. Any capital commitment by a member into a private company is made directly by that member, under applicable Canadian securities law exemptions for private issuers, and is subject to the terms those members negotiate directly with the business owner. Nothing here should be read as investment, legal, or tax advice. Owners considering a transaction should get their own independent advice before proceeding.

Last reviewed 2026-09-29.