SDE vs. EBITDA: How Buyers Will Value Your Business in 2027

Market data: Pepperdine Private Capital Markets Report 2026, GF Data 2025, and IBBA and M&A Source Market Pulse Q2 2026 (reviewed for 2027). SBA rules: SOP 50 10 8.1, effective October 1, 2026.

Most owners ask for the multiple first. That is usually the wrong starting point. Before a multiple means anything, a buyer has to decide which earnings number reflects how the business will run after closing. An owner-operator buyer may focus on seller’s discretionary earnings (SDE). A buyer who will install professional management usually focuses on adjusted EBITDA, after leaving a market-rate cost for that management in the business.

Use the wrong earnings base, or borrow a multiple from the other framework, and a valuation can look precise while being wrong.

How to Estimate What Your Business Is Worth

Work in this order:

1. Reconcile the reported financials. Monthly statements should tie to the tax returns, and any difference should be explainable.
2. Decide which expenses genuinely change after a sale. Those are your adjustments, and each one needs support.
3. Choose the earnings measure that fits the likely buyer. Use SDE if a buyer will replace you and work in the business. Use adjusted EBITDA if the business will run under paid management.
4. Apply market evidence that uses the same earnings definition. An SDE figure goes with SDE multiples, and an EBITDA figure with EBITDA multiples.
5. Get from value to proceeds. Account for debt, cash, working capital and deal structure before estimating what you would actually receive.

The multiple matters. The earnings underneath it matter more.

If you would rather have this done on your own numbers, a confidential business valuation is the place to start. It does not put your business on the market.

SDE and EBITDA Answer Different Questions

SDE shows the financial benefit available to one working owner. The International Business Brokers Association (IBBA) defines it as earnings before income taxes, non-operating and nonrecurring items, depreciation and amortization, interest, and one owner’s entire compensation, including benefits and any non-business or personal expenses the business pays.

EBITDA is earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA, in the IBBA’s definition, also removes non-operating and nonrecurring items and replaces the owner’s compensation with the market-rate cost of someone to do that job.

Neither measure is better in general. The useful one is the one that matches the buyer’s plan for the business.

Which Measure Buyers Use at Your Size

Size changes the convention. Smaller owner-operated companies are usually priced on SDE. Once a company is large enough to run without its owner, and especially once private equity groups and strategic acquirers are bidding, buyers price adjusted EBITDA. In the IBBA and M&A Source Market Pulse survey, the switch happens at about $2 million in purchase price. That is a survey convention, not a hard rule.

Multiples also rise with size. Larger companies usually have deeper management, more diverse customers and access to more buyers and cheaper financing, so buyers pay more for each dollar of earnings.

Sources: Pepperdine Private Capital Markets Report 2026 (business broker survey, deal-size quartiles); GF Data average TEV/EBITDA on private equity-backed deals, January to September 2025 (all deals and platform buyouts) and H1 2025; IBBA and M&A Source Market Pulse Q2 2026; Axial. For deals above $5 million, brokers in the Pepperdine survey reported a middle range of 6.1x to 8.0x EBITDA, with a median of 7.5x.

How to read this table:

• These are averages and survey ranges, not a price list. Within any size band, a company with recurring revenue, strong margins, a management team and no customer concentration can trade well above the band. A company that depends on its owner or one customer can trade below it.
• Industry matters. In the Pepperdine 2026 survey, investment bankers reported median multiples for $5 million to $10 million EBITDA companies from 5.5x to 6.5x depending on industry, and for $10 million to $25 million EBITDA companies from 7.0x to 8.5x.
• The spread inside each band is wide, and the buyer and process matter. In Axial’s closed-deal data from Q3 2024 to Q3 2026, for companies averaging about $2.3 million of EBITDA and $11 million of enterprise value, the median deal closed at 4.3x EBITDA, with the middle half between 3.2x and 5.7x, before any earnouts. Private equity buyers paid a 5.1x median, and Technology & Software (5.8x) and Healthcare & Health Services (5.7x) led the sectors. Axial’s own read is that the quality of the sell-side process and of the buyer can move the multiple as much as company size.
• The bands are by enterprise value, not revenue. Find your row from a realistic value range, not from your sales figure.
• Use the earnings definition the multiple was built on. An EBITDA multiple applied to SDE overstates value, because SDE has not paid for management.
• Check the date. These are 2025 and 2026 figures. Markets move, and we update this table each year.

Main Street businesses under about $2 million in price usually sell on SDE, typically at about 2x to 4x depending on size, owner dependence and earnings quality. In the IBBA Market Pulse survey for Q2 2026, medians rose from 2.0x SDE for deals under $500,000 to 3.1x for deals of $1 million to $2 million.

Two Earnings Bridges: SDE and Adjusted EBITDA

An earnings bridge walks from the profit on the tax return to the earnings a buyer will actually price. The two examples below are illustrative, not client figures. They show how the same logic produces different numbers depending on who the likely buyer is.

Example 1: SDE bridge for an owner-operated company

A specialty services company with $6.0 million in revenue. The owner runs the business day to day, and the likely buyer is an individual or a small group who will step into that role.

At 3.0x to 3.6x SDE, the middle range brokers reported for deals of $2 million to $5 million, that points to a value of roughly $3.9 million to $4.6 million, before working capital and deal terms. A buyer who plans to hire a general manager would instead take out a market salary of about $150,000, leaving adjusted EBITDA of about $1,135,000. At 3.5x to 4.5x EBITDA that cross-checks at roughly $4.0 million to $5.1 million.

Example 2: Adjusted EBITDA bridge for a company with management in place

A regional distribution company with $32 million in revenue, a general manager and a finance lead. The likely buyers are private equity groups and strategic acquirers, who price adjusted EBITDA.

At 6.5x to 7.5x adjusted EBITDA, in the middle of reported multiples for deals this size, that points to an enterprise value of roughly $23.1 million to $26.6 million, about $25 million at the midpoint.

Two things to notice:

• Adjustments cut both ways. Below-market rent to a related party comes out of earnings, just as excess owner pay goes back in. Buyers will make both corrections whether the seller does or not.
• Enterprise value is not the check you receive. In a typical cash-free, debt-free deal, the $25 million is reduced by debt repaid at closing, adjusted up or down for working capital against the peg, and shaped by how much is paid in cash versus seller notes or earnouts. That is covered below.

Neither example means a business is worth one amount under SDE and another under EBITDA. Each figure belongs with a different set of comparable sales and multiples.

Match the Multiple to the Earnings Base

A multiple is shorthand for a larger judgment about growth, risk, transferability, capital needs and buyer demand. It only works when the earnings figure and the market evidence use the same definition. The IRS business valuation guidelines make the same point: multiples should be consistent with the benefit stream being valued.

Definitions also differ between data sources. One database may include inventory in the price and another may not. One may report a cash-free, debt-free enterprise value, and another the total paid. Working capital, real estate, earnouts and seller financing can all distort a quick comparison.

The useful question is not “What is the highest multiple I can find?” It is “Which transactions are actually comparable once the definitions and deal terms line up?”

Add-Backs Are Claims, Not Automatic Credits

An add-back tells a buyer that a recorded expense will not continue under new ownership. Buyers will test that claim.

Before treating an item as an adjustment, ask:

• Was it actually recorded in the financial statements or tax returns?
• Is it truly nonrecurring, discretionary, owner-specific or unrelated to operations?
• Will a buyer need to keep paying it after closing?
• Is it already reflected elsewhere in the earnings bridge?
• Was it treated the same way in every period?
• Is there an invoice, payroll record, contract or other document behind the amount?
• Have unusual gains been treated as carefully as unusual costs?

Items that may be supportable include one-time litigation costs, an owner’s personal vehicle, or pay above the market cost of replacement management. Items that usually do not disappear just because the owner wants them to include ordinary marketing, recurring repairs, necessary software and the labor needed to do the departing owner’s job.

The SEC’s guidance on non-GAAP measures is written for public companies, not private sales, but its warnings fit. An adjusted figure can mislead when it removes normal, recurring cash operating costs, when adjustments change between periods without explanation, when it removes unusual charges but not unusual gains, or when its label does not describe what was calculated.

For more, see Owner Add-Backs: What Buyers Accept and Challenge.

Normalization Issues We Check First

These are the checks we run when we prepare a business for sale. They describe how SeaRidge Advisory reviews earnings, not findings from any particular client. Some apply to both measures; some matter only for SDE or only for adjusted EBITDA, which is where many sellers overstate their numbers.

Checks for both SDE and adjusted EBITDA

• Related-party costs at market rates. Rent paid to an owner’s property company, family members on payroll, or services bought from a related business may need adjusting up or down to what an unrelated party would charge.
• “One-time” costs that come back. A repair, legal bill or recruiting cost that shows up most years is a recurring cost, even if each instance looks unusual.
• Gains removed along with costs. If an unusual expense comes out, an unusual gain in the same period comes out too, such as an asset sale, an insurance recovery or a one-off grant.
• The same rules every year. An adjustment made in one year and not another needs an explanation.
• Personal expenses with proof. Vehicles, travel, meals and memberships run through the business are add-backs only when records show they are personal and will not continue under a new owner.
• Revenue recognized in the right period. Deposits, prepaid work and year-end billing timing can move earnings between years. Buyers rebuild the trend month by month.
• Accrual-basis view. Cash-basis books can hide unpaid bills and uncollected receivables. Buyers usually restate to an accrual view before they apply a multiple.

SDE-only checks (owner-operated businesses)

• One owner’s pay, once. SDE adds back one working owner’s total compensation and benefits. A spouse, partner or second owner who works in the business is a real labor cost a buyer will still have to pay.
• The owner’s real hours. If the owner covers a role a buyer would have to hire for, such as sales, estimating or operations, that cost does not disappear just because the owner did it unpaid.

Adjusted EBITDA-only checks (businesses with management in place)

• A realistic replacement salary. Owner pay comes out, and the market cost of the manager or managers the business still needs goes in. It should be what the role would cost to hire, not a placeholder.
• Every owner and family role priced at market. Under adjusted EBITDA, there is no single owner add-back. Each role the business needs is costed as if it were filled by an employee.
• Run-rate adjustments with support. Adjustments for a new contract, a closed location or a recent price increase need documentation and a clear start date. Buyers discount projections dressed up as adjustments.

Capital needs kept in view (both)

• Equipment and capital spending. EBITDA does not deduct the equipment the business must keep replacing. Buyers estimate maintenance capital spending and price it in.
• Working capital. The cash tied up in receivables, inventory and payables is part of what a buyer is buying. It is covered next.

Working Capital: The Adjustment Many Sellers Miss

Net working capital is roughly current operating assets (receivables, inventory, prepaid expenses) minus current operating liabilities (payables, accrued expenses). Cash and debt are usually left out because most deals are priced cash-free, debt-free.

A buyer expects the business to be handed over with a normal level of working capital, enough to keep operating without the buyer putting in more cash on day one. That normal level is usually set as a target, often called the peg, based on the business’s average over a recent period such as the trailing 12 months, adjusted for seasonality and one-off swings.

At closing, the actual working capital is compared with the peg:

• Above the peg: the price usually goes up by the difference.
• Below the peg: the price usually goes down by the difference.

A final true-up after closing settles the difference once the closing balance sheet is confirmed.

Why it matters to your proceeds:

• The peg is negotiated. A peg set from a seasonal high, or that counts slow-paying or uncollectible receivables, can cost the seller real money at closing.
• Running working capital down before a sale backfires. Collecting receivables early or delaying payables lowers the closing balance and comes back as a price reduction.
• Inventory needs a clean count. Obsolete or slow-moving stock is usually excluded or written down before the peg is set.

Our working-capital guide walks through how the peg is calculated in more detail.

What Buyers Look At Beyond the Earnings Number

Two businesses can report the same adjusted EBITDA and receive very different offers. Buyers underwrite how durable and transferable the cash flow is, not just last year’s total.

• Revenue quality: customer concentration, recurring revenue, churn, contract terms and pricing power.
• Management depth: whether key relationships and decisions live only with the owner.
• Financial reliability: clean monthly statements, tax-return reconciliation, sensible accounting policies and a clear adjustment schedule.
• Growth quality: whether recent growth is repeatable or came from one customer, one project or unsustainable spending.
• Capital needs: maintenance capital spending, inventory, receivables and the working capital needed to operate normally.
• Operational risk: key-employee dependence, licensing, supplier dependence, litigation and compliance exposure.
• Deal terms: cash at closing, seller financing, rollover equity, earnouts, indemnities and who carries risk after closing.

Value Is Not the Same as Proceeds

A headline value is not what you take home. Debt payoff, transaction costs, taxes and the working-capital adjustment all come out first. Part of the price may also arrive later, or depend on future results.

In the Q2 2026 Market Pulse, cash paid at closing made up between 83% and 92% of deal value on average, depending on the size segment. Seller financing, earnouts and retained equity made up the rest. A lower price with clean cash terms can beat a higher one tied to an aggressive earnout.

The working-capital adjustment above is one of the reasons the closing check differs from the headline price.

SDE and EBITDA Are Not Complete Valuation Methods

The IRS business valuation guidelines name three generally accepted approaches: asset-based, market and income. They say all three should be considered, with professional judgment used to select the approaches that best fit. The SBA’s guidance for owners selling a business lists the same three.

• Income approach: value based on the future economic benefits the business is expected to produce.
• Market approach: comparison with relevant sales of similar businesses.
• Asset approach: the value of assets less liabilities. It can matter more for asset-heavy or underperforming businesses.

SDE and EBITDA are earnings measures used inside these approaches. They are not methods on their own. A formula also cannot decide whether the owner is replaceable, a customer will stay or a forecast is credible. That still takes judgment.

If Your Buyer Uses an SBA Loan

If your buyer will finance the purchase with an SBA 7(a) loan, the SBA’s lending rules (SOP 50 10 8.1, effective October 1, 2026) shape how the lender tests your price:

• The lender orders its own valuation. For a change-of-ownership loan, the business valuation must be requested by and prepared for the lender. The lender cannot use a valuation prepared for the buyer or the seller.
• It must come from a qualified, independent appraiser. The appraiser must hold one of the credentials the SBA lists (ASA, CBA, ABV, CVA or BCA) and be independent of the loan decision. When the purchase price is $350,000 or less and buyer and seller are not closely related, the lender may do its own valuation.
• Your numbers are checked against IRS transcripts. The lender must verify the financial information behind the valuation against the seller’s IRS tax transcripts.
• Price above the valuation needs equity. If the price exceeds the business valuation, the difference must be made up with equity.
• At $3 million and up, expect a Quality of Earnings report. For business expansion and initial acquisition purchases of $3 million or more, the lender must also obtain a QoE report. The threshold is measured before buyer equity and seller financing.

What this means for a seller: if a likely buyer will use SBA financing, a price that your tax returns cannot support is hard to finance, however strong the management reports look.

Tax Returns Still Matter

Management reports may show the business more clearly than a tax return, but buyers reconcile the two, and SBA lenders are required to. Tax returns are an independently filed record of revenue, expenses, owner pay and taxable income. They will not explain every adjustment, but any difference must be understandable.

Be ready to provide:

• Three years of business tax returns
• Monthly profit-and-loss statements and balance sheets
• A general ledger or detailed expense support
• Payroll records and owner-compensation detail
• A written schedule for each proposed adjustment
• Customer, vendor and revenue-concentration data
• Capital spending and working-capital history

If reported earnings cannot survive basic reconciliation, the conversation shifts from value to credibility. A buyer may cut the price, change the terms or walk away. The Quality of Earnings checklist covers that deeper review.

Where SeaRidge Advisory Fits

SeaRidge Advisory helps owners reconcile SDE and EBITDA, test adjustments, find market evidence that uses the same definitions, and understand how buyer type and deal terms affect value. We typically advise on transactions of about $3 million to $50 million or more. You can see who we work with and how a sale engagement runs.

Frequently Asked Questions

Is SDE usually higher than EBITDA?

Often, because SDE adds back one working owner’s total compensation while adjusted EBITDA keeps the market cost of necessary management. But it depends on the facts. The higher number is not automatically the right one for a buyer or for a given multiple.

Can the seller choose whether to use SDE or EBITDA?

The seller can present an analysis, but the likely buyer, operating model, company size and market evidence decide which framework carries weight. A buyer who needs a management team will not ignore that cost because SDE produces a bigger number.

Are add-backs guaranteed?

No. Every add-back is a claim that should be supported and tested. A buyer may accept it, reject it, reduce it or treat it differently in the purchase agreement.

Are tax returns more important than internal financial statements?

They serve different purposes. Tax returns are a filed historical record, and monthly internal statements show timing and operating detail. Buyers usually reconcile both, and SBA lenders must check the numbers against IRS transcripts.

Is EBITDA the same as cash flow?

No. EBITDA does not deduct capital spending, debt service, changes in working capital or taxes. Those cash needs still matter to value and deal structure.

Sources

All sources accessed October 21, 2026.

1. International Business Brokers Association, Glossary (“Discretionary Earnings”, “Adjusted EBITDA”). https://www.ibba.org/resource-center/glossary/
2. IBBA and M&A Source, Market Pulse Q2 2026 Highlights (PDF, August 2026). https://www.ibba.org/wp-content/uploads/2026/08/mp-highlights-q2-2026.pdf
3. IBBA and M&A Source, The Market Pulse Survey Q2 2026 Reports the Latest Trends in Business Sales up to $50M (release distributed by SellYourWay.org via PR Newswire, August 25, 2026). https://www.prnewswire.com/news-releases/the-market-pulse-survey-q2-2026-reports-the-latest-trends-in-business-sales-up-to-50m-302858664.html
4. Internal Revenue Service, IRM 4.48.4, Business Valuation Guidelines (revised September 22, 2020). https://www.irs.gov/irm/part4/irm_04-048-004
5. U.S. Small Business Administration, Manage your business: Close or sell your business. https://www.sba.gov/counseling/manage-your-business/#close-or-sell-your-business
6. U.S. Small Business Administration, SOP 50 10 8.1, Lender and Development Company Loan Programs, with Technical Policy Updates (effective October 1, 2026), Appendix 15. https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs
7. Craig R. Everett, 2026 Private Capital Markets Report, Pepperdine Graziadio Business School (revision date June 22, 2026), Table 31 (p. 65) and Figures 114 to 115 (pp. 137 to 138). https://digitalcommons.pepperdine.edu/gsbm_pcm_pcmr/19/
8. GF Data, ESOP Report Q3 2025, Chart 1 (p. 2), average TEV/EBITDA on private equity-backed deals, January to September 2025. https://gfdata.com/wp-content/uploads/Q3-25_GFData_ESOP_Report.pdf
9. GF Data, The Size Premium and the ESOP Competitive Advantage (January 27, 2026), platform buyout averages by deal size. https://gfdata.com/size-premium-esop-competitive-advantage/
10. GF Data, Small Deal Resilience: H1 2025 (November 11, 2025). https://gfdata.com/small-deal-resilience-h1-2025/
11. Axial, What Are Businesses Selling For? Valuation Multiples by Company Size, Sector & Buyer Type (last updated September 8, 2026), closed deals Q3 2024 to Q3 2026. https://www.axial.net/forum/valuation-multiples/
12. U.S. Securities and Exchange Commission, Non-GAAP Financial Measures: Compliance and Disclosure Interpretations, Questions 100.01 to 100.03 and 100.05. https://www.sec.gov/rules-regulations/staff-guidance/corporation-finance-interpretations/non-gaap-financial-measures

This guide provides general educational information, not legal, accounting, tax or investment advice. The right earnings measure, adjustments, methods and transaction terms depend on the company and the buyer.