How SDE and EBITDA multiples estimate what a business is worth
An earnings multiple turns one year of earnings into a rough value for the business. It is an estimate for planning, not an appraisal. This page explains the two common earnings measures, shows the arithmetic on a fictional landscaping company, and explains why the multiple is always an assumption.
By Matthew Dettman, ChFC, CLU, founder of Second Difference Solutions. Updated .
What is an earnings multiple valuation?
An earnings multiple valuation takes a measure of what the business earns in a year and multiplies it by a number, the multiple. The answer is a starting estimate of what the operating business might be worth to a buyer. This page explains two earnings measures for small businesses: EBITDA and SDE.
What is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation and amortization. It starts from net income on the profit and loss statement and adds back four costs that depend on how the business is financed, taxed or how its equipment is written down, rather than on how it operates:
- interest expense on loans;
- income taxes;
- depreciation of equipment, vehicles and buildings;
- amortization of intangible assets.
What is left is a view of operating earnings that two businesses with different loans or tax positions can be compared on.
What is SDE (seller's discretionary earnings)?
SDE begins where EBITDA ends. To get from EBITDA to SDE, add back:
- the total pay and benefits of one working owner;
- personal or discretionary costs the owner runs through the business;
- one-time costs that are not expected to recur.
The result shows what the business earns for a single owner who runs it day to day. SDE suits a business where the owner is the main operator and a buyer would step into that role. EBITDA suits a business where managers are already in place and the owner's pay is a cost the business would carry under any owner.
Where does the multiple come from?
The multiple is always an assumption. It stands for how much a buyer might pay for each dollar of yearly earnings, and it moves with the size of the business, how steadily it grows, how much it depends on a few customers or on the owner, and the market at the time of a sale. This page does not quote a typical multiple or a range: a published range needs a named survey and a date, and a qualified valuation professional can tell you what applies to a given business.
Worked example: a fictional landscaping company
These figures are from the 2025 profit and loss statement of a fictional landscaping company, the sample data behind the 2diff Business landscaping whitepaper. It is not a real business. For more on how a landscaping business reads its numbers, see financial analysis for landscaping companies.
| Line | Amount |
|---|---|
| Net income, 2025 | $81,765 |
| Add back: interest expense | $3,120 |
| Add back: income taxes (no income tax line) | $0 |
| Add back: depreciation | $17,085 |
| Add back: amortization (no amortization line) | $0 |
| EBITDA, 2025 | $101,970 |
The company's 2025 statement has no income tax line and no amortization line, so those add-backs are zero. Its payroll taxes and its taxes and licenses are operating costs, not income tax, so they stay in.
Assumption: assume a multiple of 4 for illustration. The number is chosen to keep the arithmetic easy to follow; it is not a market figure and not a suggestion for this or any business.
EBITDA of $101,970 times the assumed multiple of 4 gives an estimate of $407,881 for the fictional landscaping company.
| Assumed multiple | Estimate |
|---|---|
| 3.5 | $356,896 |
| 4.0 | $407,881 |
| 4.5 | $458,866 |
SDE for this example. The fictional company's statement has no wage line for the owner: the owner takes draws, which sit on the balance sheet and not in expenses. So the EBITDA above already carries no owner wage, and it is closer to SDE before any personal or one-time add-backs than to the EBITDA of a manager-run business. A buyer comparing it with a manager-run business would first subtract a market wage for the owner's role. This page does not put a separate number on SDE, because the personal and one-time add-backs are figures only the owner can supply.
This is an estimate for planning, not an appraisal. It uses one year of a fictional company's figures and an assumed multiple, and it does not look at debt, cash on hand, the terms of a sale or the market.
How does 2diff Business estimate business value?
2diff Business by 2diff.io reads your QuickBooks® Online reports and its Valuation tab runs six methods side by side: book value, revenue multiple, SDE multiple, EBITDA multiple, capitalized earnings and discounted cash flow. Each method shows its estimate with inputs you can change, and a summary compares the results. The multiple-based methods also show the estimate at a half point below and above the multiple you chose.
You set the multiples, discount and growth rates yourself, and you can save your starting assumptions on the Valuation Defaults card in Settings. The figures are analysis of your own books for planning, not an appraisal and not advice. Valuation is included with your 2diff Business subscription. See the 2diff Business user guide for each method.
Frequently asked questions
Is an earnings multiple estimate the same as an appraisal?
No. Multiplying a year of earnings by a multiple gives an estimate for planning, not an appraisal. A formal valuation for a sale, a loan, a partner buyout or a tax filing comes from a qualified valuation professional who reviews the books, the market and the terms of the deal.
What is the difference between SDE and EBITDA?
Both start from net income and add back interest, income taxes, depreciation and amortization. SDE goes one step further and also adds back one owner's pay and any personal or one-time costs run through the business, so it shows what the business earns for a single owner who runs it. EBITDA leaves the owner's pay in as a cost.
Where does the multiple in a business valuation come from?
The multiple is an assumption. It reflects how much a buyer might pay for each dollar of yearly earnings, and it moves with the size of the business, its growth, its risks and the market at the time of a sale. This page quotes no typical multiple; the one in the worked example is chosen only to make the arithmetic easy to follow.
Why show the estimate at more than one multiple?
Because the result moves in step with the multiple. Showing the same earnings at a half point below and above the chosen multiple makes it plain how much of the estimate rests on that one assumption.
Related
- Financial Ratios ExplainedWhat each ratio measures, which statement it reads, and a worked example.
- Small Business Finance GlossaryPlain-language definitions of the statement, ratio, forecast and valuation terms.
- 2diff Business for AccountantsA plain-language read of a client's books, with the accountant as the advisor.