How to Evaluate a Business to Buy: The DCCF Method Explained
The single most important skill in buying a business is knowing what it’s worth. Overpay and you’re underwater from day one. Underbid and you lose the deal. Get it right and you walk into a business that pays for itself.
The problem? Most valuation guides are written for investment bankers and MBAs. They’re full of jargon, complex models, and assumptions that don’t apply to a Main Street business generating $200,000 a year.
That’s where the DCCF method comes in — a practical, clear approach to valuing a small business that any experienced professional can use.
What is the DCCF method?
DCCF stands for Discretionary Company Cash Flow. It’s the valuation framework Jamie L. Johnston uses in Own Your Next Job, and it focuses on the metrics that actually matter for a buyer:
- How much cash does the business generate for the owner? (Seller’s Discretionary Earnings / SDE)
- How reliable and repeatable is that cash flow?
- What’s the appropriate multiple for this industry and size?
- What discount should you apply for risk?
The core formula
At its simplest:
Business Value = Adjusted SDE × Industry Multiple − Risk Discount
Let’s break each piece down.
Step 1: Calculate Seller’s Discretionary Earnings (SDE)
SDE is the total financial benefit the business provides to the owner. Start with net profit, then add back:
- Owner’s salary and benefits
- One-time or non-recurring expenses
- Personal expenses run through the business
- Depreciation and amortisation
- Interest on business debt
This gives you the true earning power of the business under an owner-operator.
Step 2: Apply the right multiple
Small businesses typically sell for 2-4x SDE, depending on:
- Industry — service businesses tend toward 2-2.5x; businesses with recurring revenue or intellectual property can command 3-4x
- Size — larger businesses (SDE above $500K) command higher multiples
- Growth trend — growing businesses are worth more than flat or declining ones
- Customer concentration — if one client is 40% of revenue, that’s a risk that lowers the multiple
The appendix of Own Your Next Job includes a reference guide to SDE multiples by industry and business size — invaluable for benchmarking.
Step 3: Discount for risk
Every business has risks that the financials don’t fully capture:
- Is the owner the primary relationship with key clients?
- Are there pending legal issues?
- Is the industry facing regulatory changes?
- How dependent is the business on one supplier?
- Are key employees likely to stay after the sale?
These factors should reduce the price you’re willing to pay — sometimes significantly.
A quick example
A commercial cleaning company has an adjusted SDE of $180,000. The industry multiple for service businesses of this size is 2.5x.
Base valuation: $180,000 × 2.5 = $450,000
But: the owner personally manages the three largest accounts (30% of revenue), and one key employee has hinted they might leave. You apply a 15% risk discount.
Adjusted valuation: $450,000 × 0.85 = $382,500
That’s your starting point for the offer — not a ceiling, but a rational, defensible number.
Why this matters
Too many first-time buyers rely on the seller’s asking price or an advisor’s opinion. Both are starting points, not answers. The DCCF method gives you your own independent valuation — one you can explain to your accountant, your bank, and yourself.
For the full framework with worked financial statements and a complete case study, see Chapter 6 of Own Your Next Job.