How to Value a Small Business: SDE, EBITDA, and Market Multiples Explained

By Charlie Brennan • Published June 22, 2026 • Updated June 22, 2026 • Educational content only — not financial, legal, or tax advice.

Every business acquisition starts with a single question: is this price fair? Sellers anchor to an asking price; buyers anchor to what the cash flow can support. Understanding how small businesses are valued is the difference between getting a good deal and overpaying by hundreds of thousands of dollars.

This guide walks through the two dominant methods — SDE and EBITDA — explains how to normalize earnings with add-backs, and gives you the multiple ranges by business type so you can benchmark any asking price in minutes.

The Income Approach: What Small Businesses Are Actually Sold On

Unlike public stocks, small businesses aren't priced on revenue or growth potential. They're priced on what the business puts in the owner's pocket. The metric that captures that is either SDE or EBITDA — and which one you use depends on business size.

SDE (Seller's Discretionary Earnings)

SDE is the standard for businesses below roughly $2M in sale price. The formula:

SDE = Net profit + Owner salary + Owner perks + Depreciation/amortization + Interest + One-time/non-recurring expenses

The logic: SDE represents the total economic benefit available to a single working owner. You add back the owner's salary because a new owner will pay themselves from that same pool. You add back perks (personal vehicle, cell phone, travel, family payroll) because they're discretionary. You add back one-time expenses because they won't recur.

Example: A landscaping business with $80K net profit, a $120K owner salary, $15K in personal vehicle expenses run through the business, and $10K in equipment repairs from a one-time storm = $225K SDE.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

EBITDA is used for larger businesses ($2M+ asking price) where a new owner will hire a manager rather than work in the business. The formula:

EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization

Unlike SDE, EBITDA does not add back the owner's salary — because a management-layer salary is a real cost the buyer will continue to pay. EBITDA tends to produce a lower earnings number than SDE, but commands higher multiples because the business runs without the owner.

Add-Backs: The Most Negotiated Number in a Deal

Add-backs are the adjustments that convert a tax-optimized P&L into a true picture of earnings. Sellers maximize them; smart buyers scrutinize every one.

Legitimate add-backs

• Owner's salary and any family member salaries above market rate
• Personal expenses run through the business (vehicle, insurance, phone, travel)
• One-time legal or professional fees
• Non-recurring repair or capital expenditure
• Depreciation and amortization (non-cash charges)
• Interest on debt that will be retired at closing

Questionable add-backs — push back here

• "Owner's time" applied to unpaid work — fine if documented, but how many hours and at what rate?
• Marketing or travel expenses claimed as personal — get the invoices
• Recurring "one-time" expenses (if it happened in three of the last five years, it's recurring)
• Above-market rent paid to an owner-controlled entity — verify fair market rent, and confirm the lease transfers

The cleanest approach: request three years of tax returns plus three years of P&Ls and reconcile them line by line. Gaps between what was filed and what the P&L shows deserve a direct explanation.

Market Multiples: What Buyers Are Actually Paying

Once you have a credible SDE or EBITDA figure, multiply it by the market multiple for that industry and size tier. Multiples are driven by business quality, growth trajectory, customer concentration, and the current credit environment.

SDE multiples (small businesses, typically <$2M asking price)

EBITDA multiples (mid-market, $2M–$10M EBITDA)

These ranges are wide intentionally — a business at the top of its range has high recurring revenue, low customer concentration, documented systems, and strong growth. A business at the bottom has the opposite.

What Pushes a Multiple Up or Down

Multiple expanders: recurring or contracted revenue, no single customer over 20% of revenue, documented processes (the business runs without the owner), clean books, growing revenue trend, defensible market position, transferable customer relationships.

Multiple compressors: heavy owner dependence, one or two customers who represent most of revenue, seasonal or lumpy cash flow, deferred maintenance, lease not transferable, declining revenues, thin margins, unclear add-backs.

A business with heavy owner dependence should trade at a discount to market — because you're not buying a system, you're buying a job. That's fine if the price reflects it.

The Asset Approach: A Sanity Check, Not a Primary Method

For service businesses, the income approach is the right primary method. But for asset-heavy businesses (manufacturing, distribution, real estate), the asset approach provides a floor: what would you get if you liquidated everything? If the income-based value is below liquidation value, something is wrong with either the earnings or the asking price.

The asset approach is also useful during due diligence. The AcquireCalc deal calculator lets you input the business's owned assets (equipment, inventory, receivables, real estate) and model how they can be used to fund the acquisition itself — reducing your cash at closing even while paying fair market value.

The Market Comps Approach: What Did Similar Businesses Sell For?

Comparable transactions (comps) anchor a valuation when you can find them. BizBuySell, BizQuest, and IBBA transaction databases publish median multiples by industry and size tier annually. Business brokers in your target industry see dozens of deals per year — a 30-minute conversation with one is worth more than any database subscription.

When comparing comps, normalize for size. A $500K SDE business will trade at a lower multiple than a $2M SDE business in the same industry, because the buyer pool for larger deals is smaller and the businesses tend to be more institutionalized.

Putting It Together: A Quick Valuation Example

A residential cleaning company with 12 employees in a mid-size metro:

• Net profit (from tax return): $95,000
• Owner salary: $85,000
• Owner vehicle expense: $12,000
• One-time legal fee: $8,000
• SDE: $200,000

Market multiple range for professional services: 2.0x–3.5x. This business has 8 years of operating history, strong Yelp reviews, and 60% repeat customers — call it 2.8x.

Estimated fair market value: $200,000 × 2.8 = $560,000

If the seller is asking $650,000, that's a 3.25x multiple. Not unreasonable — but you'd want to verify the add-backs, confirm the lease transfers, and model whether the cash flow supports the debt service before deciding if it's worth the premium.

Use the Calculator to Model the Deal

Once you have a valuation, the next step is modeling the deal structure: how much can the seller finance, how much can you pull from the business's assets, and what does your cash at closing actually look like? The AcquireCalc deal calculator was built for exactly this.

Related Guides

• Valuation multiples by industry — deeper breakdown
• SDE / EBITDA calculator — compute your earnings number
• Due diligence checklist — verify what you're buying
• Seller financing explained — structure the deal after you agree on price
• Asset purchase vs stock purchase — choose the right deal structure

Sources & Further Reading

• BizBuySell Insight Report — quarterly transaction data on small business sale prices and multiples by industry
• SBA: Buying an Existing Business — government guidance on the acquisition process and financing
• International Business Brokers Association (IBBA) — industry standards and annual transaction research
• IRS: Selling Your Business — tax treatment of business sales and asset allocation rules