Last month a guy showed me a “deal” he was about to close. Seller wanted $280,000 for a cleaning company doing $320,000 in revenue.

“Great margins,” he said. “Almost 1x revenue.”

I asked for the P&L. Owner was taking $65,000 in salary. Net profit was $12,000.

That business was worth $77,000. He was about to overpay by $203,000.

Don’t be that guy.

I’m going to teach you the exact valuation method I use, plus every trick sellers use to inflate numbers, so you can spot bullshit before it costs you six figures.

The Only Formula You Need

Forget revenue. Forget EBITDA. For small service businesses under $2M in revenue, there’s one number that matters:

SDE (Seller’s Discretionary Earnings)

SDE = Net profit + Owner’s salary + Owner’s perks + One-time expenses

This tells you what you’ll actually make if you buy this business and run it yourself.

Example calculation:

Start with the tax return:

• Revenue: $420,000
• Cost of services: $168,000
• Gross profit: $252,000
• Operating expenses: $147,000
• Net profit: $105,000

Now add back owner-specific stuff:

• Owner’s salary: +$72,000
• Owner’s health insurance: +$18,000
• Owner’s truck payment: +$9,600
• Owner’s phone: +$1,800
• Wife on payroll (doesn’t work): +$24,000
• One-time legal fee: +$8,000

SDE: $238,400

That’s what you’d make running this business. The tax return showed $105K profit. Reality is $238K available to the owner.

Now multiply by the appropriate multiple:

Service businesses typically sell for 2.0x to 3.0x SDE.

• Low end (2.0x): $476,800
• Mid point (2.5x): $596,000
• High end (3.0x): $715,200

If the seller wants $800,000, they’re dreaming. If they want $500,000, you might have a deal.

What Determines the Multiple

Not all businesses deserve 3x. Here’s what moves the needle:

Gets you to 2.5-3.0x:

• Recurring revenue (contracts, subscriptions, maintenance agreements)
• Revenue grew last 3 years
• No customer is over 15% of revenue
• Owner works under 30 hours/week
• Employees handle operations
• Clean books, easy to verify
• Good online reviews (4.5+ stars)
• Been in business 5+ years

Keeps you at 2.0-2.3x:

• Project-based revenue (starts from zero each month)
• Flat or declining revenue
• Customer concentration (one client is 25%+ of revenue)
• Owner-dependent (owner does all the sales/work)
• Messy financials
• Mixed reviews
• Under 5 years old

Drops you to 1.5-2.0x or walk away:

• Declining revenue
• Key person risk (one employee or the owner IS the business)
• Single customer over 40%
• Pending legal issues
• Cash business with unverifiable revenue
• Owner working 60+ hours

How to Verify the Numbers (Without Getting Screwed)

Tax returns lie by omission. P&Ls lie by commission. Bank statements don’t lie.

Step 1: Bank Statement Math

Request 24 months of business bank statements.

Add up every deposit. Ignore transfers from personal accounts or loans – you want customer payments only.

That total should be within 10% of reported revenue. If it’s not:

• Lower than reported = inflated revenue (red flag)
• Higher than reported = unreported cash (also red flag – you can’t finance invisible revenue)

Exact script to request this:

“To move forward with due diligence, I’ll need 24 months of business bank statements. I’m specifically looking to verify revenue against deposits. Is that something you can provide this week?”

If they refuse, walk. Legitimate sellers have nothing to hide.

Step 2: Verify the Add-Backs

Sellers love inflating add-backs. “I run all my personal stuff through the business.”

Maybe. Or maybe they’re making $150K look like $220K.

Suspicious add-backs:

• “Personal travel” with no documentation
• Family members on payroll “who don’t really work”
• Vague “consulting fees” to owner
• Repairs that seem like capital improvements
• “Marketing” that you can’t trace

Legitimate add-backs:

• Owner’s salary on W-2 or documented draws
• Owner’s health/life/disability insurance with premium statements
• Owner’s vehicle with documented business use
• One-time expenses with invoices (lawsuit, equipment repair, pandemic impact)
• Rent above market rate to owner-owned building

For every add-back over $5,000, ask for documentation. If they can’t prove it, don’t add it back.

Step 3: The Customer Verification Call

This is the step most buyers skip. It’s the most important.

Ask the seller for their top 10 customers with contact info. Then call them.

Script:

“Hi, this is [Name]. I’m in the process of acquiring [Business Name] and wanted to introduce myself. I understand you’ve been a customer for [X years] – I’d love to hear about your experience and make sure we continue to take care of you.”

What you’re actually doing:

• Verifying they’re real customers
• Confirming they pay what the seller claims
• Assessing if they’ll stay post-acquisition
• Building relationship before you own the business

If a “top customer” doesn’t answer and you can’t verify they exist, that revenue might be fiction.

Step 4: Employee Conversations

Meet every employee, one-on-one, without the owner present.

Questions:

• “How long have you been here?”
• “What do you like about working here?”
• “If ownership changed but nothing else did, would you stay?”
• “Is there anything about this business I should know?”

Employees will tell you the truth. They’ll tell you about the customer who’s leaving, the equipment that’s broken, the owner who actually works 70 hours, the revenue that’s declining.

Red flag answers:

• “I’ve been looking at other jobs”
• “The owner and I have different views on things”
• “Things were better a few years ago”
• Long pauses before answering anything

If key employees won’t stay, the business is worth less. Maybe a lot less.

The Negotiation Script That Saves $50,000

Most buyers don’t know how to negotiate a business purchase. They make one offer and hope.

Here’s the exact sequence:

Step 1: Anchor Low (But Not Insultingly Low)

Seller asks: $300,000 You offer: $225,000

That’s 75% of asking. Low enough to leave room, high enough to be taken seriously.

Your script:

“Based on my analysis of the financials, I’m seeing SDE of approximately $95,000. At a 2.3x multiple, which reflects [specific concern – customer concentration, owner dependency, flat revenue], I’m comfortable at $225,000. I’m flexible on structure – we can discuss seller financing that might get you closer to your number while managing my cash flow.”

Step 2: Justify Every Dollar

When they counter at $280,000:

“Help me understand how you get to $280,000. I’m showing SDE of $95K, and I’ve seen similar businesses trade at 2.0-2.5x. At $280K, we’re talking nearly 3x – that’s typically reserved for businesses with recurring contracts and no owner dependency. Can you walk me through what I’m missing?”

Make them defend the price. Usually they can’t.

Step 3: Trade Concessions for Value

“I could get closer to $260,000 if we structure it with seller financing. 70% at close, 30% as a seller note over 36 months. That gets you most of your money now, premium interest on the balance, and gives me comfort that you believe in the business’s sustainability.”

Now you’ve reframed. It’s not “take less money.” It’s “take more money over time.”

Step 4: Use Time Pressure (Real or Manufactured)

“I’m evaluating two other opportunities right now. I’d like to move forward with yours, but I need to make a decision by [date]. What would it take to get this done at $240,000 with the seller financing we discussed?”

Sellers hate losing a sure buyer. Competition – even implied – creates urgency.

Real Example: The Deal I Almost Blew

Let me tell you about a commercial cleaning company I valued last year.

Seller’s claims:

• Revenue: $480,000
• Owner salary: $96,000
• Net profit: $60,000
• SDE: $156,000
• Asking price: $450,000 (2.9x – aggressive)

My analysis found:

• Bank deposits: $412,000 (not $480K)
• “Owner salary” included $22,000 to wife who never showed up
• One-time $18,000 “equipment repair” was actually a truck purchase
• Two customers (38% of revenue) were on month-to-month and had complained recently

Adjusted SDE: $98,000

At 2.2x (reflecting the customer concentration and month-to-month risk), fair value was $215,000.

They were asking double the real value.

I presented my analysis. The seller got angry. Said I was insulting him. Deal died.

Three months later, his broker called. The business was still on the market. The two big customers had left. Revenue was now $290,000.

We closed at $140,000.

Patience and math beat emotion every time.

The Red Flags That Should Kill a Deal

Some problems aren’t negotiating points. They’re walk-away signals.

Walk away if:

Revenue is declining more than 15% year-over-year. You’re catching a falling knife. No valuation technique saves you from a dying business.

The owner IS the business. If revenue depends on the owner’s personal relationships and they’re exiting, you’re buying a customer list, not a company.

Single customer is 40%+ of revenue. That’s not a business. That’s a contractor relationship. When that customer leaves – and they always eventually do – the business implodes.

Cash payments are significant and unverifiable. “We actually do $600K but only deposit $400K.” Cool story. I can only value and finance what I can prove. And you just admitted to tax fraud.

Employees are planning to leave. The operations manager taking another job? That’s 3-6 months of chaos while you rebuild. Price it in or walk.

Pending litigation or regulatory issues. Lawsuits follow the business, not the owner. You inherit them.

The seller won’t provide transition support. If they want to close and disappear, they’re hiding something.

Making the Decision

Here’s the framework:

Step 1: Calculate SDE conservatively. When in doubt, don’t add it back.

Step 2: Apply the right multiple. Be honest about weaknesses.

Step 3: Verify everything. Bank statements, customer calls, employee interviews.

Step 4: Calculate your return.

• Purchase price: $250,000
• Down payment (15%): $37,500
• SDE: $100,000
• Loan payment (85% over 10 years): ~$32,000/year
• Net cash flow year 1: $68,000

Step 5: Ask yourself:

“Would I pay $37,500 to make $68,000 per year?”

That’s an 181% cash-on-cash return. Yes, you would.

If the math works, make the offer. If it doesn’t, wait for the next one.

There are always more businesses for sale than good buyers. Time is on your side.

Want help evaluating a business acquisition? Azgari Foundation has analyzed hundreds of service business deals. We’ll review your target, verify the numbers, and help you structure an offer that makes you money. Book a call before you overpay.

Frequently Asked Questions

How do I start a service business in 2026?

Start by choosing a service type based on demand, skills, and startup costs. Then register your business, get required licenses, purchase equipment, set up insurance, and begin marketing to your target customers.

What’s the most profitable service business to start?

Profitability depends on your market and execution. High-margin services include HVAC, plumbing, electrical, and specialized cleaning. Lower-cost startups like pressure washing and lawn care can also be highly profitable.

How much money do I need to start a service business?

Startup costs range from $5,000 for basic services (cleaning, lawn care) to $100,000+ for licensed trades (HVAC, plumbing). Many profitable businesses launch for $15,000-$30,000 with essential equipment and marketing.

Do I need experience to start a service business?

No, many successful owners started with zero experience. Learn through training, shadowing, and starting with simpler jobs. Business skills often matter more than technical expertise, which can be hired.

How long until a new business is profitable?

Most service businesses can be profitable within 3-6 months with consistent effort. Breaking even typically happens in 6-12 months. Building to full income replacement usually takes 12-24 months.

Should I buy a franchise or start independently?

Independent businesses offer more control and no royalty fees (5-8% ongoing). Franchises provide systems but limit flexibility. For most service businesses, independent ownership with proper guidance provides better returns.

Related Reading

• Complete Guide to Service Business Startup Costs
• Hidden Costs of Buying a Franchise
• How to Get an SBA Loan for a Service Business

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