When to Use SDE vs. EBITDA: A Guide for Business Owners

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When to Use SDE vs. EBITDA: A Guide for Business Owners

If you're thinking about selling your business, one of the first things you'll need to understand is how buyers will value it. The metric they use depends largely on the size of your company.

The Basic Split

For smaller businesses (typically under $2M in revenue), buyers care most about Seller's Discretionary Earnings (SDE). This is your business's cash flow plus your salary, benefits, and any personal expenses you run through the company. It's the total financial benefit you get from owning the business.

For larger businesses (roughly $5M and up), the focus shifts to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This strips out owner compensation and looks at the business as a standalone entity that could be run by a hired management team.

What the Data Shows

Recent M&A data from Q2 2025 shows this split clearly. Here's what's happening in the market:

Small businesses (under $500K): About 75% of deals use SDE, often without working capital included. The median multiple held steady at 3x.

Mid-sized businesses ($500K to $5M): This is where it gets mixed. Between $500K and $1M, you'll see SDE used about 61% of the time. But once you get into the $1M to $2M range, EBITDA starts showing up in 60% of deals. By the time you're in the $2M to $5M range, EBITDA (usually with working capital) is used in 71% of transactions.

Larger businesses ($5M to $50M): EBITDA dominates here, used in about 86% of deals. Working capital is almost always included in the calculation.

Why the Difference Matters

The logic is pretty straightforward. When someone buys a small business, they're usually buying themselves a job. They want to know what they'll actually take home. SDE answers that question directly.

But when buyers look at larger businesses, they're making an investment. They might install professional management or add your company to an existing operation. They care about the underlying earnings power of the business itself, not what the current owner takes home. That's where EBITDA comes in.

As Joshua Jones from Sapphire Mountain Group puts it: "A 4x multiple isn't always worth more than one at 3x if the terms behind it are fundamentally different."

Current Market Conditions

The Q2 2025 data shows something interesting. Median multiples held relatively steady across most categories, sitting between 3x and 6x depending on business size. But there were two notable exceptions:

The smallest businesses (under $500K) saw multiples edge up to 2.3x, recovering from a dip in Q1. And the $5M to $50M category rebounded to 5.5x, bouncing back after investor demand cooled earlier in the year.

Deal timelines also returned to normal levels. Most transactions are taking 6 to 9 months from engagement to close, depending on deal size. The brief spike in the $5M to $50M segment last quarter has settled back down.

What This Means for You

If you own a business under $2M, make sure your financials clearly show your SDE. Document which expenses are truly discretionary or personal. Clean books that clearly present SDE will make the sale process much smoother.

If you're running a larger operation, start thinking in EBITDA terms early. As Lisa Riley from Delta Business Advisors notes: "Understanding how your business will be valued isn't just about knowing your earnings. SDE might be the norm for smaller, owner-run businesses, but once you cross into the Lower Middle Market, buyers expect to see clean EBITDA, often with working capital included."

Here's the thing: understanding which metric applies to your business isn't just accounting jargon. It shapes how buyers will evaluate what you've built and what multiple they'll be willing to pay. Get this right early, and you'll be in a much better position when it's time to sell.

Dan Hansher

About the Author

Dan Hansher

Dan Hansher is a Senior Investment Banking Analyst at Cornerstone Business Services, specializing in lower middle market M&A advisory. With 100+ business valuations completed and extensive marketing leadership experience, he brings a rare combination of financial analysis and operational expertise. Dan has led major brand integrations including a $2B acquisition, driven digital transformation initiatives, and developed brand positioning strategies across multiple industries. He helps business owners understand what drives value and prepares them for successful exits. Dan holds an MBA from UW-Whitewater and specializes in translating complex financial concepts into clear, actionable strategy.

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