How to Understand SDE, EBITDA, and Revenue Multiples

Learn the three key valuation metrics buyers use to price your business and how to calculate what your company is worth.

1. Calculate your Seller's Discretionary Earnings. Start with net income, then add back: owner salary and benefits, owner perks (car, travel, family payroll), one-time expenses, and non-cash expenses like depreciation. SDE shows what a single owner-operator would earn running your business. Most deals under $2M use SDE multiples.
2. Calculate EBITDA for larger deals. Take net income and add back interest, taxes, depreciation, and amortization. Unlike SDE, EBITDA assumes professional management stays in place. Buyers use EBITDA multiples for deals above $2M where the owner isn't the primary operator.
3. Find your industry's typical multiples. SDE multiples typically range 1.5x to 4x for small businesses. EBITDA multiples run 3x to 8x for mid-market deals. Software and recurring revenue businesses command higher multiples. Asset-heavy or cyclical businesses get lower multiples.
4. Adjust multiples based on your business quality. Add 0.5-1x for: recurring revenue above 70%, growth above 15% annually, or proven systems that run without you. Subtract 0.5-1x for: customer concentration above 20%, declining revenue, or owner-dependent operations.
5. Calculate revenue multiples as a cross-check. Divide typical sale prices by annual revenue to get revenue multiples. Most service businesses sell for 0.5x to 2x revenue. Use this to sanity-check your earnings-based valuation. If they're far apart, dig into which businesses actually sold at those prices.
6. Test your numbers against recent comparable sales. Find 3-5 businesses that sold in your industry, size range, and geography within the last 18 months. Compare their multiples to your calculation. If yours is 50% higher than recent sales, your expectations need adjustment.