Business Valuation Multiples: SDE vs EBITDA and What to Pay by Industry
Small and mid-sized businesses are priced with a simple formula: earnings × multiple = value. The art is in choosing the right earnings figure and the right multiple. Get either wrong and you overpay by hundreds of thousands of dollars — or lose a good deal by lowballing.
SDE vs EBITDA: Which Earnings Number?
SDE estimates earnings available to one working owner before that owner's compensation. EBITDA means earnings before interest, income taxes, depreciation and amortization; it does not automatically remove owner compensation or account for a replacement manager. Buyers often use adjusted EBITDA with documented adjustments and a market-rate cost for the work the owner performs.
Start from the same accounts and period. Add back an expense only if it was deducted in those accounts and the adjustment is justified. Owner distributions that never reduced profit are not an expense to add back. Recurring costs needed to run the business cannot simply disappear from the buyer's model.
Worked example: one business, two earnings measures
Suppose annual net income is $100,000 after $20,000 interest, $10,000 income taxes, $15,000 depreciation and amortization, and $80,000 compensation for one working owner. Assume no other adjustments. EBITDA is $145,000; adding back that owner's $80,000 compensation produces $225,000 SDE. If replacing the owner's work costs $90,000, the illustrative adjusted EBITDA is $135,000. The replacement cost is an assumption to verify, not automatically the owner's former pay.
Calculate SDE and adjusted EBITDA for your deal, then match the resulting earnings measure to comparable-sale multiples. Neither figure is take-home cash: debt payments, capital spending and working-capital needs still matter.
SDE will often exceed EBITDA when positive owner-compensation addbacks apply, but the difference depends on the adjustments. Applying an EBITDA multiple to SDE can overstate value; compare like with like. See BizBuySell's explanation of SDE and owner compensation.
Typical Multiple Ranges
- Owner-operated service businesses (home services, agencies, restaurants): 1.5—3× SDE
- Established businesses with staff ($250K—$1M earnings): 2.5—4× SDE
- Lower middle market ($1M—$5M EBITDA): 3—6× EBITDA
- Recurring-revenue / SaaS / contract-based: 4—8× EBITDA or revenue-based multiples
- Healthcare, niche manufacturing, defense-adjacent: often 5—8× EBITDA due to buyer competition
These are directional — the real number lives in comparable-sale data for the specific industry and size band. Business brokers, industry associations, and deal databases like BizBuySell are the places to look. A 30-minute call with a broker who does 20 deals a year in your target industry is worth more than any spreadsheet.
What Moves a Multiple Up or Down
Up: recurring or contract revenue, a management team that runs daily operations without the owner, diversified customers (no client over 10—15% of revenue), clean financials with three years of growth, documented systems, defensible IP, and a growing industry.
Down: owner dependence ("the business is the seller"), customer concentration, declining or lumpy revenue, deferred maintenance, messy books, lease risk, and key-person risk in sales or production.
The Multiple Delta: Your Negotiation Compass
Divide the asking price by the earnings figure to get the implied ask multiple, then subtract the industry multiple. This multiple delta tells you instantly how the seller has priced the company:
- Delta ≤ 0: priced at or below market — move quickly, verify why.
- Delta 0—1×: normal seller optimism — negotiable with comps.
- Delta > 1×: significantly overpriced. Either the seller knows something the listing doesn't show, or they're anchored to a number they "need." Present the math, then bridge the gap with terms (seller financing, earnout) rather than cash.
The AcquireCalc calculator computes the delta automatically and caps your suggested offer at the lower of the asking price and fair market value.
Bridging a Price Gap With Terms Instead of Cash
When a seller is anchored above fair market value, don't argue — restructure. Offer the full ask price contingent on: 60—80% seller financing at modest interest, an earnout tied to the revenue the seller claims is coming, or both. If the seller's projections are honest, they get their price. If not, you're protected. Sellers who refuse all performance-based structure are telling you what they really think of their own forecasts.
Sanity-Check Every Valuation
Before you trust any multiple, verify what you're multiplying. Request three years of tax returns — not just the internal P&L, which the seller controls. Reconcile bank deposits to reported revenue. Recompute owner add-backs yourself, line by line. For deals above $1M, push for a quality-of-earnings review from an independent CPA. A correct multiple on a fabricated earnings number still gets you the wrong price.
How to Apply This Guide
Use valuation multiples as a cross-check, not a shortcut. After selecting a range, write down why the business deserves the low end, midpoint, or high end. The explanation should mention revenue quality, customer concentration, growth, owner dependence, margins, documentation, assets, and transferability.
Then test the value through financing. A price may sit inside a market multiple range but still be too high if debt service consumes most normalized cash flow. The strongest offer is one that is defensible on both comparable-value logic and post-close affordability.
Typical multiples by industry: see the industry multiples reference for ranges across 18 sectors.