Ask two advisors what your business is worth and you may get numbers 30% apart — not because they disagree on the multiple, but because one used SDE and the other used EBITDA. Getting this call right is the difference between an accurate range and one that costs you real money.
The plain-English definitions
SDE (Seller's Discretionary Earnings) is the total financial benefit a single full-time owner-operator gets from the business. It adds back the owner's entire compensation package, plus any personal expenses running through the P&L.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is operating profit assuming the owner is already replaced with a fair-market salaried manager. That manager's cost stays in the expense stack.
Which one applies to your business
The rough Colorado market convention:
- SDE is used when owner earnings are below about $1.5M–$2M and the buyer will personally step into the operator seat (an individual buyer, a searcher, an SBA-financed acquisition).
- EBITDA is used when the business is large enough that any realistic buyer — private equity, a strategic acquirer, a family office — will install professional management.
The threshold isn't strict. A $1.2M-SDE business already run by a full-time GM under the owner is often quoted on EBITDA. A $2.5M-SDE business where the owner is still the top salesperson gets pulled back to SDE. What matters is who the realistic buyer is.
Why the multiples are different, on purpose
SDE multiples look lower (typically 2x–4x) because the number itself is bigger — it includes the owner's pay. EBITDA multiples look higher (typically 4x–7x for small-market deals) because the number is smaller — the buyer's replacement manager cost is already subtracted. You cannot cross-shop them.
A business with $600K SDE ≈ $350K EBITDA (after subtracting a $250K replacement GM). 3.5x SDE = $2.1M. 6x EBITDA = $2.1M. Same deal, two different quotes. The problem starts when someone quotes 6x SDE or 3.5x EBITDA — that's either sloppy or a sales tactic.
The mistake that costs sellers real money
The most common misstep: an owner hears "your industry trades at 5x EBITDA" and applies that to their SDE number. On a $600K SDE business that's a $3M expectation vs. a realistic $1.8M–$2.1M range. When buyers come in at what the math actually supports, the seller thinks they're being lowballed and walks — and re-lists a year later having lost time and momentum.
How to know which one you're being quoted
Ask three questions of anyone giving you a number: (1) Are you using SDE or EBITDA? (2) What did you subtract for a replacement owner if it's EBITDA? (3) What comparable transactions is that multiple anchored to? If you don't get clean answers to all three, the number is a guess dressed up as analysis.
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