How to Determine Your Budget When Buying a Business
How to Determine Your Budget When Buying a Business
So, you’ve decided to dip your toe into buying a business. Congratulations! That first step is exciting—but it can also feel overwhelming.
One of the most common questions new buyers ask is:
“How do I know what my budget should be?”
Let’s break it down into a clear, actionable framework.
Think in Terms of a Range: High and Low Thresholds
Budgeting for a business isn’t just about what you can spend. It’s about finding the sweet spot: a range that fits your financial goals and borrowing capacity.
Instead of a single number, think in terms of:
Minimum price: the lowest you should consider, based on the earnings you want to take home.
Maximum price: the highest you can afford without stretching yourself financially or taking on unnecessary risk.
The goal? Find opportunities that fall comfortably in the middle.
Step 1: Understand SDE (Seller’s Discretionary Earnings)
Most businesses are priced based on their profit, also known as SDE — Seller’s Discretionary Earnings.
Think of SDE as the amount of money you could reasonably expect to take home each year as the owner. It’s a practical starting point for determining whether a business is worth pursuing.
Ask yourself: What’s the minimum annual profit I need for this business to make sense?
This number becomes your minimum SDE, which most online platforms allow you to filter in search results.
Step 2: Apply a Multiple to Estimate Purchase Price
Once you know the SDE, the next step is understanding valuation multiples. Most small businesses sell for 2x–4x their annual earnings, depending on the industry, stability, and growth potential.
For example:
Business generates $100,000 SDE
Typical multiple: 3x
Estimated purchase price: $300,000
This isn’t a hard-and-fast rule — negotiation and industry-specific factors can change the number. But it’s a reliable starting point for your budget planning.
Step 3: Determine Your Maximum Budget
Next, consider how much capital you have available for a down payment. Most buyers will need financing, and many lenders (including SBA loans) require a minimum of 10% down.
Continuing our example:
Business price: $300,000
10% down: $30,000
If you have $50,000 to invest, that increases your potential purchase ceiling to around $500,000.
This gives you a practical budget range to start your search, but remember: there’s nuance here. Every deal is different, and financing structures can vary, especially if the seller offers financing or other creative arrangements.
Take the Guesswork Out of Budgeting
Understanding your budget is one of the first critical steps in buying a business. Getting this wrong can waste months of your time or push you into deals that don’t make sense financially.
If you want a deeper dive into setting your budget, learning how to assess financing options, and building a structured search plan, I can help.
Join me at Team Rise Consulting — where I guide aspiring business owners through the entire process, from determining budget to closing the right deal.