ARR is the size, SDE is the return
Annual recurring revenue tells a buyer how big the business is. Owner earnings tell them what they get for owning it. At this size the buyer is usually a person or a small fund spending their own money, and they price the return.
Revenue multiples belong to companies bought for a market position or a product roadmap. Nobody buys a one-person software business for its strategic position. They buy it for the cash it produces and the chance that cash still arrives in year three.
SDE adds back what a new owner would not inherit and subtracts what they would. Your own salary is added back, because the buyer is pricing the business without you in it. Then the real cost of running it comes off.
The worked example
| Step | This business |
|---|---|
| Monthly recurring revenue | $10,000 |
| Annual recurring revenue | $120,000 |
| Gross profit at 85% margin | $102,000 |
| Operating allowance, 15% of revenue | −$18,000 |
| Owner earnings, SDE | $84,000 |
| Base multiple, $10,000–$25,000 MRR band | 3.2x |
| SDE times the base multiple | $268,800 |
| Net effect of the five adjustments | 112% |
| Range | $274,000–$328,000 |
| The same range, quoted on revenue | 2.5x |
Every row computed by the engine on this site from one input set: $10,000 MRR, 2.5% monthly growth, 3.2% churn, 85% margin, 30 months live, largest customer 15% of revenue. Comps updated 24 Aug 2026.
The last row is the one founders quote to each other. It is a result, not a method: 2.5x of revenue is what 3.6x of owner earnings happens to equal at 85% margin. Change the margin and the revenue multiple moves without the earnings multiple budging.
What the 15% allowance represents
Gross margin already removes hosting, third-party APIs and payment fees. It does not remove the cost of the business continuing to exist. The 15% allowance is our proxy for that: the running cost a new owner inherits on day one, expressed as a share of revenue.
- 01Software the business runs on: error tracking, email, analytics, support desk, CI.
- 02Support and maintenance hours, valued at what it costs to hire them rather than at zero because you do them.
- 03Company overhead a buyer keeps paying: accounting, legal, insurance, domains, compliance.
- 04The share of acquisition spend that is upkeep rather than growth.
Where founders get SDE wrong
- 01Forgetting to add their own salary back, which understates earnings and the price with it.
- 02Adding back work that still has to happen. If you do 20 hours a week of support, the cost of that support is real and stays in.
- 03Counting one-off revenue — a consulting project, a lifetime deal — inside recurring earnings. Buyers strip it out and re-base the multiple.
- 04Reporting margin before payment fees. At small ticket sizes those fees are worth a point or two of margin.
Each of those moves the earnings figure, and the earnings figure is multiplied by 3.2x before any adjustment. An error of $5,000 in owner earnings is an error of roughly $16,000 in the price.