SDE vs. EBITDA: Which Number Is Your Business Actually Sold On?

The question I hear most from owners in Los Angeles and Orange County is some version of "What multiple do businesses like mine sell for?" It is the wrong first question. The first question is: a multiple of what?

Here is the short answer. If your business will sell for under roughly $2 million, buyers and brokers price it on SDE — seller's discretionary earnings, the total cash benefit to one working owner. Above roughly $2 million, the market shifts to EBITDA — earnings after a paid manager is in the seat. That is how the IBBA and M&A Source Market Pulse survey reports national deal data, and it is how most buyers and lenders will look at your business. The two numbers are not interchangeable, and the multiples that go with them are not interchangeable either.

What SDE is

SDE starts with the net profit on your books and adds back everything a single owner-operator takes out of the business, plus the expenses a new owner will not have. The standard add-backs:

• One owner's full salary and payroll taxes. Only one. If you and a spouse both draw pay, the second salary is usually a real cost the buyer will have to replace.
• Owner benefits run through the business — health insurance, a vehicle, a cell phone, retirement contributions.
• Interest, depreciation and amortization. The buyer will have his own financing and his own depreciation schedule.
• Genuine one-time expenses — a lawsuit settlement, a one-off remodel, a bad-debt write-off that will not repeat.
• Discretionary personal expenses that are documented and clearly not needed to run the business.

SDE answers one question: if one person buys this business and runs it full time, how much cash does it produce for that person before debt service? That is why it is the standard for owner-operated companies. The typical buyer of a Main Street business is buying a job plus a return.

What EBITDA is

EBITDA is earnings before interest, taxes, depreciation and amortization — but in a business sale, it is adjusted EBITDA, and the key adjustment runs the other way from SDE. The owner's compensation is not added back in full. Instead, it is replaced with what it would cost to hire a market-rate general manager to do the owner's job.

That is the right lens once the buyer is not going to run the business personally: a private-equity group, a strategic acquirer, a search fund, or an individual buyer who plans to own rather than operate. Those buyers need to pay someone to sit in your chair, so they price the business on what is left after that salary.

The practical rule: EBITDA is SDE minus the cost of replacing the owner (and minus any other owner-related add-backs a non-operating buyer would not accept).

The same business, both ways

A hypothetical example, round numbers for clarity only — this is not a client deal:

Apply a 3x multiple to the SDE and you get $1,425,000. Apply 4x to the EBITDA and you get $1,380,000. Different multiples, different earnings figures, roughly the same value. That is the point. The multiple and the earnings number travel together, and the market sets them as a pair.

The mismatch that costs sellers

The most common pricing error I see is mixing the two. An owner reads that businesses are selling at four, five, six times earnings — those are EBITDA multiples on larger deals — and applies that number to his SDE. On the example above, 5x SDE would be a $2.4 million asking price for a business the market values near $1.4 million. That listing sits. Buyers, and the SBA lenders most of them rely on, recalculate the number themselves in the first week of review.

The reverse mistake is rarer but more expensive. A business with a real management team and an owner who works a few hours a week gets priced on SDE as if it were owner-operated. That owner is underselling the one thing that makes his business worth more: it does not need him. If your business already has a paid GM, it should be presented on adjusted EBITDA and marketed to the buyers who pay for that.

Which number applies to you

Deal size is the usual dividing line, but it is not the only one. Your business will most likely be priced on SDE if:

• You work in it full time and the customers know you by name.
• The likely buyer is an individual using SBA financing. BizBuySell's Q2 2026 survey found 78% of buyers expect to use SBA financing.
• The total value is under roughly $2 million.

It will more likely be priced on adjusted EBITDA if:

• A general manager or operations lead already runs the day-to-day.
• Earnings are large enough to attract private equity, a strategic buyer, or a search fund.
• The total value is above roughly $2 million.

Plenty of businesses sit near the line. Those are the ones where the presentation decision matters most, and where it can make sense to show both numbers to different buyer groups.

Add-backs: where value is won and lost

Whichever measure applies, the multiple is only as good as the earnings figure it sits on, and the earnings figure is only as good as the add-backs you can prove. Buyers and lenders will accept add-backs that are documented, owner-specific, and clearly non-recurring. They will strike the rest.

Market conditions make this more important right now, not less. BizBuySell's Q2 2026 Insight Report describes a market defined by stricter underwriting and deeper financial scrutiny, and recorded a 10% year-over-year drop in completed transactions even as the average cash-flow multiple rose. Buyers are paying for quality and verifying everything. An add-back you cannot support with a receipt, a payroll record or a bank statement is not worth a multiple — it is a reason to doubt the rest of your schedule.

Three habits make add-backs survive diligence:

• Keep personal and business spending separate going forward. Every personal expense you stop running through the business is an add-back you no longer have to defend.
• Document one-time items when they happen, not three years later.
• Reconcile your P&L to your tax returns and bank deposits. An SBA lender will.

If you are two or three years from a sale, that cleanup is worth more than any negotiating tactic. How to prepare your business for sale covers the rest of the list.

What to do with this

Know which number you are selling on before you think about a multiple. Rebuild your SDE from your tax returns, line by line, with an add-back schedule you could hand to a lender. If you have a manager in place, rebuild adjusted EBITDA too. Then compare against sold comps for your industry — not asking prices, and not the multiple a friend heard at a trade show.

The multiples above are national. A trades business in the Inland Empire, a med spa in Newport Beach and a distributor in the San Fernando Valley do not all trade at the national average. If you want to know where your business would land against Los Angeles and Orange County comps, start with the valuation questionnaire. For more depth, what your business is worth walks through the full valuation process, what an HVAC or plumbing business is worth applies SDE multiples to a single industry, and SBA loans for buying a business explains what your buyer's lender will look at.

Sources

IBBA & M&A Source, Market Pulse Survey Q2 2026 — Highlights and press release (published August 25, 2026; fielded July 1–15, 2026; 255 advisors, 181 transactions). Purchase prices under $2M reported as a multiple of SDE; $2M–$50M as a multiple of EBITDA. BizBuySell Insight Report, Q2 2026 (average cash-flow multiple 2.7; median cash flow $155,921; 2,117 closed transactions; 78% of surveyed buyers expect to use SBA financing). Figures are national unless stated otherwise. The worked example is hypothetical and for illustration only.