EBITDA, SDE, and Multiples — Explained in Plain English

If you've started reading about selling a business, you've run into a wall of acronyms — EBITDA, SDE, multiples — thrown around as if everyone was born knowing them. They're actually simple ideas wearing intimidating names. Once they click, you'll understand exactly how buyers arrive at a price.

Earnings first: the profit a buyer actually cares about

The number at the bottom of your tax return is designed to minimize tax, not to show a buyer what the business earns. So buyers don't use it. Instead they rebuild your earnings into one of two figures, depending on the size of the business.

SDE — Seller's Discretionary Earnings

Used for most small, owner-operated businesses (roughly under $1–2M in earnings). SDE answers: “What's the total financial benefit to one working owner?” You start with net profit and add back:

• The owner's salary and benefits (one owner's).
• Interest, taxes, depreciation, and amortization.
• One-time or non-business expenses (that “conference” in Cabo).

EBITDA — Earnings Before Interest, Taxes, Depreciation & Amortization

Used for larger businesses that run with management in place, or when the buyer will be an investor rather than an owner-operator. EBITDA does notadd back a market-rate manager's salary, because the business still has to pay someone to run it. That's the core difference from SDE.

The multiple: how many years of earnings

Once you have an earnings figure, value is simply that number times a multiple. A multiple of 3× means a buyer is paying roughly three years of current earnings for the business.

Value ≈ earnings × multiple. A $400,000 SDE business at a 3× multiple is worth about $1.2M.

The multiple isn't arbitrary. It reflects how risky and transferable those earnings are. Lower risk and easier transfer mean a higher multiple — and a higher price for the same profit.

What pushes a multiple up

• Recurring revenue — contracts and repeat customers a buyer can count on.
• Low owner-dependence — the business runs without the seller.
• Growth — rising revenue in a healthy industry.
• Diversified customers — no single client who could sink the ship by leaving.
• Clean books — earnings a buyer can verify quickly.

What drags a multiple down

• Revenue that depends on the owner's personal relationships.
• One customer making up a large share of sales.
• Lumpy, project-based income with no repeat base.
• Flat or declining revenue, or a shrinking industry.
• Messy financials that slow down or spook a buyer.

Why your industry sets the starting point

Different industries trade in different multiple ranges, because their earnings carry different risk. A software business with recurring subscriptions might trade at 4× or more; a restaurant, closer to 2×. That's why a good valuation starts from comparable sales in your industry, then adjusts up or down for the levers above — rather than applying one generic number to everyone.

Want to see it applied to your own numbers? Read What Is My Business Actually Worth? next, or run your figures through a valuation and see your range.