Imagine sitting at an industry conference and hearing that businesses in your sector are selling for five or six times earnings. You return home, speak with an advisor, and are told your business might command a multiple closer to two or three. That gap between market chatter and your actual valuation can feel frustrating, but it is rarely a reflection of your company’s quality. Instead, it comes down to which ruler is being used to measure your earnings.
The two most common metrics used to value a business are Seller’s Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). They measure the same economic benefit, but for entirely different types of buyers.
SDE is designed for the individual owner-operator. It starts with net income and adds back your salary, benefits, and personal perks. It tells a buyer exactly what they can expect to pocket if they run the business full-time. Because SDE includes the owner’s compensation, the earnings number is higher, meaning the multiple applied to it is naturally lower. According to BizBuySell data from late 2025, the average SDE multiple for small businesses was 2.57x (reference). Similarly, the International Business Brokers Association reported that businesses valued under $500,000 traded at a median of 2.3x (reference).
EBITDA strips out owner compensation completely. It measures the operating earnings of the business as a standalone entity, assuming the buyer will hire professional management. This metric is used by private equity groups and corporate acquirers who are buying an investment, not a job. Because EBITDA is a smaller earnings base, the multiple looks much larger. For example, businesses valued between $5 million and $50 million received average valuations of 5.5x EBITDA (reference).
A business priced at 3x SDE and the same business priced at 5x EBITDA can produce the exact same total enterprise value. The multiple only matters when you understand the earnings figure it is attached to… Hence why valuation multiples can get tricky.
