What is SDE and when is it used?

Seller's Discretionary Earnings (SDE) adds owner compensation, discretionary expenses, and non-recurring items back to net income. It is commonly used for owner-operated small businesses under roughly $2M in earnings.

What is EBITDA and when is it used?

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is typically used for larger, professionally managed businesses where the owner is not essential to daily operations.

What is a valuation multiple?

A multiple is a ratio (e.g., 2.5× SDE or 5× EBITDA) applied to normalized earnings to estimate business value. Multiples vary by industry, size, growth, customer concentration, and transferability.

When is asset-based valuation used?

Asset-based valuation is used when a business is asset-heavy (equipment, inventory, real estate) or when earnings are minimal, negative, or unreliable.

Business Valuation

How businesses are valued

A plain-language walkthrough of SDE, EBITDA, valuation multiples, and asset-based approaches — and when each one applies.

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Small businesses are typically valued using earnings-based methods (SDE for owner-operated businesses, EBITDA for larger operations) multiplied by an industry- and risk-adjusted multiple, or using asset-based approaches when earnings are minimal. The right method depends on business size, owner involvement, industry norms, and quality of financial records.

Seller's Discretionary Earnings (SDE)

Used for owner-operated businesses. Starts with net income, then adds back owner compensation, discretionary expenses, interest, taxes, depreciation, and non-recurring items. Reflects the total financial benefit to a single working owner.

EBITDA

Used for larger, professionally managed businesses. Adds back interest, taxes, depreciation, and amortization only. Owner compensation is treated as a real operating cost because a replacement manager would be required.

Valuation multiples

Industry norms set the starting range
Growth trend, customer concentration, and margin quality adjust up or down
Recurring revenue, documented processes, and management depth typically increase the multiple
Owner dependency, key-customer risk, and weak records typically decrease it

Asset-based approaches

Used when earnings are minimal, negative, or unreliable, or when a business is asset-heavy (equipment, inventory, real estate). Value is derived from the fair market value of assets less liabilities.

What actually moves the number

Normalized, defensible earnings
Clean, reviewable books
Reduced owner dependency
Diversified customer base
Documented systems and transferable operations

Preliminary valuation estimates are educational only and are not appraisals, opinions of value, or offers to buy or sell. Actual transaction value depends on buyer type, deal structure, financing, due diligence, and market conditions.