Valuation methodology
SDE or EBITDA: choosing the earnings figure the multiple applies to
Both metrics describe the profitability of the same business, and they will not agree. Which one you use decides which multiple is admissible, and the most expensive mistake in private-company valuation is mixing the two.
Seller's discretionary earnings
SDE is the metric for small and mid-sized owner-operated businesses conventionally those under about $5M in revenue. It answers a specific question: how much total financial benefit does a single working owner take out of this business in a year? Because the buyer of such a business is usually an individual stepping into the seller's job, owner compensation is treated as a return rather than a cost.
SDE
Pre-tax net profit
+ Owner's salary and compensation
+ Discretionary and non-essential expenses
+ One-off, non-recurring expenses
+ Interest expense
+ Depreciation and amortisation
= SDE
Use SDE when:
- The owner is the primary manager, and the business is dependent on them.
- The business is a main-street operation: restaurant, workshop, retail unit, small agency.
- The likely buyer is an individual who will replace the seller's role rather than hire into it.
EBITDA
EBITDA, earnings before interest, tax, depreciation and amortisation, is the standard for businesses that already run without their owner in the operating seat. It measures operational profitability stripped of financing and accounting decisions, which is what makes companies with different capital structures comparable to one another.
EBITDA
Operating profit (EBIT)
+ Depreciation
+ Amortisation
= EBITDA
EBITDA assumes management is paid a market-rate salary, and that salary stays in the cost base. That single difference is why EBITDA is always the lower figure.
Use EBITDA when:
- The business has a management team that survives the owner's departure.
- The likely buyer is a trade acquirer or a private equity house.
- You need the figure to be comparable with transactions in the same sector.
The multiple follows the metric
Multiples are not portable between the two bases. A multiple observed against EBITDA cannot be applied to an SDE figure, because SDE already contains the owner's pay. Indicative bands:
These bands are reconciled internal estimates, not a verified sample of closed transactions. Two businesses of the same size in the same sector routinely trade several turns apart on customer concentration, revenue quality and owner dependence alone.
What the mix-up costs
The error worth naming: taking an EBITDA multiple from a sector report and applying it to an SDE figure. It roughly doubles the seller's expectation, and it is usually discovered late, after months of a process.
Illustrative only
- Normalised SDE
- $450,000
- At 3x, an SDE multiple
- $1.35M
- At 6x, an EBITDA multiple applied in error
- $2.70M
Same business, same accounts, two very different conversations. The figures above are arithmetic on an invented example, not a transaction.
Before you accept any multiple, establish which earnings basis it was measured against. If the source does not say, the multiple is not usable.
Where these figures come from
Our industry bands are reconciled internal estimates, each carrying a sample size and an as-of date. Separately, the archive holds over 10,000 recorded transaction comparables dated from 2 September 2014 to 1 July 2025. The methodology sets out the limits of both.