The short answer is: both do, but they are not interchangeable.
The right earnings measure depends on the size, structure, and likely buyer for your business. Picking the right one is essential to building a defensible value.
I often get asked, “What size of multiples are you seeing right now?” If I respond with 1.8x–2.2x, the person can’t believe it. There are three key reasons for this shock.
#1. The multiples they see online on business-for-sale websites are much higher.
That can be true. But I am quoting numbers from businesses that have actually sold. They may be looking at asking prices for businesses that never sell at that number.
#2. They are thinking of EBITDA figures, and I’m usually quoting SDE.
Neither is wrong, but they are dramatically different measurements. A 3x multiple of one number is not necessarily comparable to a 3x multiple of the other.
#3. They know a story of a company that sold for a crazy EBITDA multiple.
That happens. A buyer may pay a premium for a specific reason: gaining market exposure, capturing a key demographic, adding capacity, or combining duplicative functions they can optimize.
Those deals are real—but they are not automatically the benchmark for every business.
When do we use SDE?
Seller’s Discretionary Earnings (SDE) is the common measurement for many owner-operated businesses. There is no hard line where SDE stops and EBITDA begins, but SDE is especially relevant when a buyer is purchasing a job and a business together.
SDE starts with profit and adds back the owner’s compensation, along with legitimate, documented adjustments such as one-time, discretionary, or non-operating expenses that will not continue under new ownership.
What we are saying with SDE is: “If you buy this business and step into the owner’s role, what cash flow is available to you?”
An SDE of $200,000 with an annual loan payment of $30,000 may leave approximately $170,000 of cash flow before taxes, needed working capital, capital expenditures, and any additional management or growth investment.
Because SDE is usually a larger number than EBITDA, the multiple applied to it is generally lower.
When do we use EBITDA?
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is generally more relevant for larger businesses, businesses with management already in place, and buyers who are not personally stepping into the owner’s role.
EBITDA is a lower number but may receive a higher multiple. However, EBITDA does not mean the owner’s work is free.
A buyer still has to account for the market-rate cost to replace the owner’s role—unless the buyer can credibly absorb those responsibilities with its existing team. A strategic buyer may already have leaders, accounting staff, or operations support in place and may not need to hire someone new to run the acquired company.
The question becomes less about, “What can one owner make?” and more about, “What earnings will this business contribute after we account for the people and resources needed to operate it?”
Why does it matter?
Not all earnings are valued equally.
A business with recurring revenue, transferable contracts, diversified customers, stable margins, and low dependence on the current owner will generally command a stronger multiple than a business with unpredictable revenue, concentrated customers, or high owner dependence.
For example, a manufacturing company with durable contracts and reliable margins may receive a stronger EBITDA multiple than a general contractor dependent on bid cycles. That does not make the GC a bad business. It simply carries a different risk profile.
Buyers are buying a return, but they are also buying risk. Most of the time, the less risky and more transferable the earnings, the higher price a buyer will pay.
The market ultimately determines what your business is worth. Our job is to use the right earnings measurement, make the appropriate adjustments, and build a defensible value that can hold up when buyers start asking questions.
Jeremiah Morton, Business Broker
