The guide
The short answer
A buyer who will run the business personally usually prices it on seller's discretionary earnings (SDE), which counts all of the owner's pay as profit. A buyer who will hire someone to run it usually uses EBITDA, which charges a market wage for that job first. EBITDA is the smaller number, so the same price is a higher multiple of it (price divided by earnings).
What is the difference between SDE and EBITDA?
Both numbers start from the same recast books. Small-business accounts are prepared for tax reporting, not to show a buyer the cash flow available to an owner. Recasting presents the same records in the way buyers and lenders assess them. Both numbers add items back to profit, meaning they stop counting them as costs: interest, taxes, depreciation, amortization, personal costs and one-off items. They split on one question: what happens to the owner's pay.
SDE (seller's discretionary earnings) counts all of one owner's pay as profit, because the buyer is expected to step into your job and pay themselves. EBITDA (earnings before interest, taxes, depreciation and amortization) treats the job as a cost. It charges a market wage for someone to do it, and adds back only the part of your pay above that wage.
A multiple is the price divided by earnings: $1.8 million for a business earning $600,000 is 3.0 times.
| SDE | EBITDA (adjusted) | |
|---|---|---|
| Owner's pay | Added back in full | Replaced by a market wage for the job |
| Size, for the same business | The larger number | Smaller than SDE by the market wage |
| Multiple, for the same price | Lower | Higher |
The same business priced both ways
This is an illustration with made-up figures, not a value for any real business.
A service business has SDE of $600,000. The owner's total pay, including payroll taxes and benefits, is $150,000. We assume a manager who could do her job would cost $110,000 in total. For reference, the Bureau of Labor Statistics put the median annual wage of general and operations managers at $105,770 in May 2025. That is a wage, and payroll taxes and benefits come on top. Your own figure depends on the role and the place.
| Step | Amount |
|---|---|
| SDE (all of the owner's pay added back) | $600,000 |
| Minus a market wage for the owner's job | $110,000 |
| EBITDA | $490,000 |
Now suppose a buyer will pay $1,800,000.
| Earnings | Multiple | Price | |
|---|---|---|---|
| Quoted on SDE | $600,000 | 3.0 × | $1,800,000 |
| Quoted on EBITDA | $490,000 | about 3.7 × | $1,800,000 |
The multiple changes. The price does not. The 3.0 is chosen to keep the sums easy; what multiple your business would get is a question for a broker or a certified appraiser.
The danger is comparing quotes. An offer of 3.0 times EBITDA would pay $1,470,000 for this business, $330,000 less than 3.0 times SDE. When two buyers quote you a multiple, ask which earnings figure they are multiplying. See how the price is built.
Which one will your buyer use?
It depends on who is buying and whether they must hire someone to do your job. The table shows common practice, not a rule.
| Buyer | Usually looks at | Why |
|---|---|---|
| An individual who will run it | SDE | They take the owner's pay, so there is no manager to pay |
| An individual using a Small Business Administration (SBA) loan | SDE for the price, a lender's version of EBITDA for the loan | The bank tests the loan against its own cash flow figure, see below |
| An investor who will hire a manager | EBITDA | The manager's wage comes out first |
| Another company | Often EBITDA, adjusted for costs the buyer expects to save | It may already have someone who can do your job |
| A private equity firm | Adjusted EBITDA | Often tested by an independent accountant, in a quality of earnings report |
The International Business Brokers Association (IBBA) and M&A Source run a quarterly Market Pulse survey of business brokers and advisors. Its fourth quarter 2022 edition (392 closed deals, but only 43 in the $2 million to $5 million band and 36 above $5 million) shows buyers following size. Individuals bought 82% of deals under $500,000 and 19% above $5 million. Private equity firms bought none of the smallest and 47% of the largest.
What an SBA lender looks at
When a buyer finances with an SBA 7(a) loan, the SBA program that can fund a business purchase, the lender has its own test. Under the SBA's SOP 50 10 8.1, effective October 1, 2026, the lender divides operating cash flow, which the SBA defines as EBITDA, by the principal and interest payments due on all of the business's debt after the sale, including the new loan. For a new owner buying the business, that ratio must be at least 1.25 to 1, on the last year or a two-year average, using the numbers as filed or after the lender's adjustments. In plain terms, for every $100,000 a year in loan payments, the business has to show $125,000 of cash flow.
The lender may adjust for items such as the owner's personal costs and pay, but the buyer's own pay has to cover their obligations and living expenses. For most purchases of a business priced at $3 million or more (not counting any real estate in the deal), the lender must also obtain an independent quality of earnings report, which has to identify above- or below-market owner compensation.
Selling to a buyer with an SBA loan covers the lender's other checks and what they mean for your sale.
At what size does a business switch from SDE to EBITDA multiples?
There is no single line, because a cutoff can be stated in revenue, in earnings or in price, and the three land in different places: at three times earnings, $1 million of earnings is $3 million of price.
The IBBA and M&A Source Market Pulse for the second quarter of 2026 reports multiples by purchase price. Its chart footnote shows deals up to $2 million as multiples of SDE, and $2 million to $50 million as multiples of EBITDA.
| Purchase price | Multiple reported, Q2 2026 | Shown as | Deals reported on SDE, Q4 2022 |
|---|---|---|---|
| Under $500,000 | 2.0 | SDE | 91% |
| $500,000 to $1 million | 2.8 | SDE | 88% |
| $1 million to $2 million | 3.1 | SDE | 68% |
| $2 million to $5 million | 4.0 | EBITDA | 63% |
| $5 million to $50 million | 5.8 | EBITDA | 19% |
The last column comes from the Q4 2022 full report: the share of closed deals brokers reported as an SDE multiple, the rest being EBITDA multiples. The switch is gradual: most deals from $2 million to $5 million were still SDE, and a third of those from $1 million to $2 million were EBITDA. The top two bands rest on 43 and 36 deals. These are survey results by price band, not what your business would fetch; ask a broker or certified appraiser.
Part of the step up from 3.1 to 4.0 is arithmetic: EBITDA is the smaller number for the same business, so the same price shows as a higher multiple. The Q4 2022 report points the same way, though from different deals: in the $2 million to $5 million band the median multiple paid was 3.0 times SDE and 4.1 times EBITDA (pages 34 and 35).
The test that matters most is in the buyer table: if the buyer steps into your job, expect SDE; if they will hire someone to do it, expect EBITDA. A business in the gray zone, where the owner matters but a manager could be hired, can be shown both ways.
Is normalized EBITDA the same as adjusted EBITDA?
Yes. Both names describe the same idea: EBITDA as reported, corrected for anything that does not reflect how the business runs day to day. Recasting produces SDE for a smaller business and adjusted EBITDA for a larger one. The corrections cover one-off costs, personal expenses, the owner's pay (added back in full for SDE, set to a market wage for EBITDA), and timing differences, for example books that record costs and sales when cash changes hands, not when the work is done.
The accounting firm KLR describes normalized EBITDA the same way. Its example adds back $200,000 for an owner paid $400,000 against a $200,000 market rate, and reduces earnings for an owner paid below market. Which add-backs buyers accept covers the rest.
What to prepare so either number holds up
- Three years of SDE and EBITDA side by side, tied to your tax returns
- A one-page description of your job: tasks, hours, who you manage, customers you handle personally
- The market wage you used, where it came from, and your CPA's agreement
- An add-back schedule with a document behind every line
- A market wage for any second owner or family member on the payroll
The less of your job only you can do, the easier the wage is to defend. See how to make your business run without you.
Where to start
Write down what your job involves in a normal week, then price it: what would it cost, with payroll taxes and benefits, to hire someone to do it? Subtract that from your SDE. The result is a rough EBITDA for your own planning. A buyer will choose their own wage, so expect them to test yours.
Then ask your CPA to check the wage, and ask a broker who sells businesses like yours which number their buyers use.
See where your business stands
Our free readiness score takes about ten minutes. Fourteen questions, scored the way a buyer would weigh them, with the three gaps most worth fixing. Nothing you enter is shared with anyone.
Keep reading
- What is seller's discretionary earnings (SDE)? How to calculate it
- Add-backs when you sell a business: what buyers accept
- What is my business worth? How to value a business for sale
This guide is general information, not tax, legal or valuation advice. Every business is different: talk to your accountant, lawyer and broker about yours.