Contents:
- Intro to Comparison
- Comparison Criteria
- SDE: Seller’s Discretionary Earnings
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization
- Comparison Table
- Who Each Is For
- A Regional Difference
- What the Pros Know
- Verdict
- FAQ
- Which multiple is higher, SDE or EBITDA?
- Can a business use both SDE and EBITDA?
- Does industry affect which multiple applies?
- Should I hire a professional for a business valuation?
- Do buyers ever negotiate the multiple itself?
- Does add-back documentation matter for SDE calculations?
- Do buyers ever combine SDE and EBITDA methods for one deal?
Why can two business owners with nearly identical revenue walk away from a sale with valuations tens of thousands of dollars apart from each other?
Intro to Comparison
SDE and EBITDA are the two most common earnings metrics buyers use to value small businesses, and choosing the wrong one can dramatically distort a sale price.
Comparison Criteria
The key differences involve how owner compensation, discretionary expenses, and company size affect which metric provides a more accurate valuation basis.
SDE: Seller’s Discretionary Earnings
SDE adds back the owner’s salary, personal expenses run through the business, and one-time costs, producing a figure that reflects total benefit to a single owner-operator.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization
EBITDA assumes a professional management team replacing the owner, making it more appropriate for larger businesses with existing management structures already in place.
Comparison Table
SDE typically applies to businesses under $1 million in revenue with an owner-operator, using multiples of 2-3x, while EBITDA applies to larger businesses using multiples of 4-8x depending on industry.
Who Each Is For
SDE suits main street businesses like restaurants or salons where the owner works full-time, while EBITDA suits larger companies a buyer plans to run with hired management.
A Regional Difference
Business valuation multiples in high-cost metro areas like the Northeast often run slightly higher than similar businesses in smaller Midwest or Southern markets.
What the Pros Know
Using the wrong metric for your business size can significantly understate or overstate value, so confirming which one fits your revenue range matters before pricing a sale.
Verdict
Smaller owner-operated businesses should value using SDE, while businesses with over $1 million in revenue and existing staff structure should lean toward EBITDA-based valuation instead.
FAQ
Which multiple is higher, SDE or EBITDA?
EBITDA multiples are generally higher in absolute terms, though this reflects larger business size rather than a genuinely higher relative valuation.
Can a business use both SDE and EBITDA?
Yes, businesses near the $1 million revenue threshold sometimes calculate both to see which produces a more defensible valuation for negotiations.
Does industry affect which multiple applies?
Yes, certain industries like healthcare or software typically command higher multiples than retail or service businesses of similar size.
Should I hire a professional for a business valuation?
Yes, a certified business appraiser or broker provides a far more defensible valuation than a rough self-calculated estimate alone.
Do buyers ever negotiate the multiple itself?
Yes, the multiple often becomes a negotiation point based on growth trends, customer concentration, and overall business risk factors.
Does add-back documentation matter for SDE calculations?
Significantly; buyers scrutinize add-backs closely, and poorly documented ones are often the first thing challenged during due diligence.
Do buyers ever combine SDE and EBITDA methods for one deal?
Occasionally, especially for businesses right at the size threshold, where both figures get calculated to sanity-check the final valuation.
