Small Business Goodwill / Key Money Payback — SDE Multiple & NPV

Evaluate the goodwill or key money paid to acquire a small business or commercial lease assignment. Computes payback period, SDE multiple, and 5-year NPV.

Goodwill / key money / business premium paid

Monthly revenue

COGS rate

Monthly rent

Labor

Other opex

Effective tax rate

Federal + state combined; pass-through entity often 15-30%.

Discount rate (NPV)

8-12% typical for small business required return.

Share with friends

How to use

1 Enter the goodwill / key money / premium paid above tangible asset value.
2 Enter monthly gross revenue and COGS (cost of goods sold) percentage.
3 Enter monthly base rent (CAM/taxes/insurance excluded), labor cost (employees + owner draw), and other operating expenses.
4 Enter your effective combined federal + state tax rate (typically 20-30% for small business owner).
5 Click Calculate to see months/years to recover premium, SDE multiple paid, NPV at 5 years, and verdict (Strong Value / Fair / Premium / Overpriced).

2026 IBBA Market Pulse Industry Multiples

Industry	Typical SDE multiple	Notes
Restaurants (independent)	1.5-2.5×	High labor; thin margins; franchise concepts trade higher
Retail (specialty)	1.8-2.8×	Inventory-intensive; depends on lease terms
Service businesses (HVAC, cleaning)	2.0-3.5×	Recurring revenue commands premium
Professional services (CPA, dental, vet)	2.5-4.0×	Customer relationships; certifications barriers
Software / SaaS	3.0-6.0× SDE or 3-8× ARR	Recurring revenue; higher-growth get higher multiples
Manufacturing	2.0-3.5×	Equipment heavy; market-dependent
Auto dealerships / repair	2.0-4.0×	Recurring service revenue
Franchise concepts	3.0-5.0×	Brand value + system support premium

SDE — The Small Business Valuation Standard

Seller Discretionary Earnings (SDE) = Net income + Owner's salary + Discretionary expenses + Interest + Depreciation + Amortization + One-time expenses. SDE represents the total financial benefit available to a single owner-operator. EBITDA is similar but for businesses with separation between owner and operator (typically $1M+ revenue businesses). Buyers use SDE for businesses under $1M revenue; EBITDA for larger.

SBA 7(a) Underwriting Standards

SBA 7(a) is the largest US small-business loan program. For business acquisitions, SBA requires: cash flow ≥ 1.15-1.25× debt service, goodwill repayable within 7 years (84 months), 10% buyer down payment, seller note acceptable for up to 5% (must be on full standby). If the business can't comfortably amortize the price within these terms, SBA won't approve and the deal probably doesn't work.

Goodwill Tax Treatment

For the buyer: goodwill is amortized over 15 years (Section 197) — straight-line deduction. For the seller: goodwill sale produces long-term capital gain (15-20% federal vs. ordinary income on inventory). Seller wants more allocated to goodwill; buyer wants more to equipment (faster depreciation). Form 8594 (Asset Acquisition Statement) reconciles allocation.

Common Mistakes

(1) Trusting seller's numbers — always verify with bank statements and tax returns; "addbacks" to inflate SDE common. (2) Ignoring lease terms — if landlord won't assign or extend, business value drops 50%+. (3) Underestimating working capital — most acquisitions need 3-6 months operating capital on top of purchase price. (4) Customer concentration — if one customer is over 25% of revenue, multiple should drop 20-30%. (5) Owner's personal goodwill — if the business runs because of one charismatic owner, that goodwill doesn't transfer.

FAQ

Q What is goodwill in a business purchase?

Goodwill is the portion of business purchase price above tangible asset value (equipment, inventory). It represents brand reputation, customer relationships, location, trained employees, and going-concern value. For tax purposes, buyer amortizes goodwill over 15 years under Section 197; seller treats sale as long-term capital gain.

Q What is a typical SDE multiple for a small business?

Per IBBA Market Pulse 2026: restaurants 1.5-2.5×, retail 1.8-2.8×, service businesses 2.0-3.5×, professional services 2.5-4.0×, software 3.0-6.0× SDE. Smaller businesses (under $500K SDE) typically lower; larger ($1M+ SDE) higher. Recurring revenue commands premium over one-time transaction businesses.

Q How does SBA 7(a) financing work for a business acquisition?

SBA 7(a) is the most common business acquisition loan. Requires 10% buyer down payment, cash flow ≥ 1.15-1.25× debt service, goodwill repayable within 7 years (84 months) from operations. Up to $5M loan amount; rates Prime + 1.5-2.75%. Process takes 60-120 days. Use SBA approved lenders only.

Q What is SDE vs. EBITDA?

Both measure cash flow. SDE (Seller Discretionary Earnings) = Net income + Owner salary + Discretionary expenses + Interest + Depreciation + Amortization + One-time. Used for owner-operator businesses under $1M revenue. EBITDA excludes owner salary — used for businesses with management separate from ownership ($1M+ revenue).

Q How is goodwill taxed?

Buyer: amortized over 15 years (Section 197) as deductible expense. Seller: long-term capital gain (15-20% federal) if held over 1 year, plus state income tax. Both parties allocate purchase price across categories on Form 8594 (Asset Acquisition Statement). Seller wants more goodwill (LTCG rate); buyer wants more equipment (faster MACRS depreciation).

Q How long should it take to pay back business goodwill?

SBA 7(a) standard: 7 years from operations. Industry rule of thumb: 3-5 years for healthy small businesses, 5-7 for mature stable businesses. Beyond 7 years suggests overpayment. The math: if monthly after-tax profit × 84 months < goodwill paid, the deal probably doesn't cash flow under SBA underwriting.

Q What due diligence should I do before buying a business?

(1) 3 years of tax returns + bank statements (verify revenue claims). (2) Customer concentration analysis. (3) Lease review — assignment language, term remaining, landlord stability. (4) Employee/team risks — non-competes, retention. (5) Industry comps via IBBA / BizBuySell. (6) QofE (Quality of Earnings) report for $500K+ deals — accountant verifies addbacks. (7) Legal review by M&A attorney. Budget $5-25K for diligence on $500K-$2M deals.

Q What is "key money" in a US lease assignment?

Less common in US than overseas. Term refers to the premium paid by an incoming tenant to take over an existing lease — typically because the lease has below-market rent or strategic location. In NYC and major retail markets, key money can run $50K-$500K+ for prime corner locations. Negotiable; landlord may have right of first refusal.