SDE vs EBITDA: Which Metric Matters for Your Business Valuation?

The $1M Question Every Business Owner Gets Wrong

When a buyer asks "what are your earnings?" — your answer depends entirely on which metric you use. For businesses under $5M in revenue, the wrong choice can swing your valuation by 30% or more.

SDE: The Small Business Standard

Seller's Discretionary Earnings (SDE) adds back everything the owner takes from the business: salary, benefits, personal expenses run through the company, one-time costs, and other discretionary spending. It answers the question: **how much cash does this business generate for a single owner-operator?**

SDE is the standard for businesses valued under $5M. Most small business buyers are individual operators who will replace the current owner — so they want to know the total economic benefit they're acquiring.

**Typical SDE add-backs include:** - Owner salary and bonuses - Owner benefits (health insurance, retirement, vehicle) - One-time legal or consulting fees - Above-market rent to related parties - Personal travel and entertainment

EBITDA: The Institutional Buyer Metric

Earnings Before Interest, Taxes, Depreciation, and Amortization strips out financing decisions and accounting choices, but keeps management compensation as a real expense. It answers: **how profitable is this business as a going concern with professional management?**

EBITDA is standard for businesses above $5–10M in revenue, where institutional buyers (private equity, strategic acquirers) will install a management team rather than operate themselves.

Why It Matters for Valuation

The metric you choose determines which multiple applies:

| Revenue | Metric | Typical Multiple | Example | |---------|--------|-----------------|---------| | $1–5M | SDE | 2.0–4.0x | $500K SDE × 3.0 = $1.5M | | $5–20M | EBITDA | 4.0–8.0x | $1.5M EBITDA × 6.0 = $9.0M | | $20M+ | EBITDA | 6.0–12.0x | $4M EBITDA × 8.0 = $32M |

Using EBITDA multiples on a $2M revenue business (where SDE is more appropriate) will systematically undervalue the company — because EBITDA doesn't capture the owner's total economic benefit.

How ValueAlpha Handles This

Our platform automatically selects the right primary metric based on your revenue size and industry. For professional services firms, we default to SDE with industry-specific normalization. For larger businesses, we use EBITDA with appropriate add-back guidance.

The result: a valuation range that reflects how real buyers would actually price your business.