Most small businesses are priced as a multiple of earnings. Smaller owner-run businesses are usually priced on seller's discretionary earnings (SDE), and larger ones on earnings before interest, taxes, depreciation and amortization (EBITDA). The multiple moves with size, industry, growth, customer concentration and deal terms, so a published average is context for the questions you ask, not a price. A credentialed appraiser or deal advisor can give an opinion of value for a specific business. This primer is for buyers who keep hearing "three times SDE" and want to know what is inside the number and what it leaves out.
The short answer
- SDE adds back one working owner's pay and perks, so it shows what one owner-operator earns. EBITDA sets the owner's pay at the cost of a replacement manager, so it shows what the business earns for an owner who does not run it. For the same business, SDE is higher.
- The industry body for business brokers reports price bands up to about $2 million as multiples of SDE and larger bands as multiples of EBITDA. The two sets of multiples are not comparable with each other.
- A multiple only helps compare businesses of similar size and risk. It ignores growth, leverage, timing, real estate, inventory and deal terms.
- Every add-back is multiplied by the multiple, so a weak add-back can cost you several times its size in price.
- Insurance touches value in four ways: the premium inside earnings, losses the seller absorbed, the savings lever after closing, and the loss history the next buyer will see.
What is SDE, and how is it different from EBITDA?
Both are attempts to answer the same question: what does this business earn, on a normal basis, before the financing and accounting choices of the current owner? They differ in how they treat the owner.
Seller's discretionary earnings (SDE) is a measure for owner-operated businesses. It starts from profit and adds back the owner's compensation and perks, along with interest, depreciation and one-time items, so a buyer sees what one working owner could take out of the business. Earnings before interest, taxes, depreciation and amortization (EBITDA), normally adjusted, removes one-time items and sets the owner's pay at a market rate for a replacement manager. In practice, SDE for a given business is higher than EBITDA by about the cost of that manager. Definitions vary by advisor and appraiser: some count only the owner's salary, others include benefits and payroll tax. Ask which definition a number uses before you compare it.
| Measure | Treats the owner as | Common use | The catch |
|---|---|---|---|
| SDE | A working owner whose full pay and perks are added back | Smaller owner-operated deals | Overstates what an absentee or hired-manager owner will earn |
| Adjusted EBITDA | An expense: a replacement manager at a market salary | Larger deals, bank underwriting, investors | Depends on what the adjustments are and how well they are supported |
The practical point for an acquirer: if you plan to hire a general manager, or you are a searcher who expects to pay yourself a salary, EBITDA is usually the closer measure of what you will earn. A seller quoting an SDE multiple may be quoting a bigger number than you would get. Ask your accountant and lender which measure they will use. For Small Business Administration (SBA) 7(a) change of ownership loans, SBA measures debt service coverage on EBITDA, and the lender may adjust for items such as seller discretionary expenses and ownership compensation.
What do published multiples actually show?
The International Business Brokers Association (IBBA) publishes a quarterly Market Pulse survey of business brokers and advisors, together with a partner group. In the Q2 2026 highlights, multiples by purchase price band were as follows. The one-page summary does not say whether the figures are medians or averages.
| Purchase price band | Earnings measure | Q2 2026 | Q2 2025 |
|---|---|---|---|
| Under $500,000 | SDE | 2.0x | 2.3x |
| $500,000 to $1 million | SDE | 2.8x | 2.8x |
| $1 million to $2 million | SDE | 3.1x | 3.0x |
| $2 million to $5 million | EBITDA | 4.0x | 3.9x |
| $5 million to $50 million | EBITDA | 5.8x | 5.5x |
Notice what the table does not tell you. The SDE rows and the EBITDA rows are different measures, so a step from 3.1x to 4.0x is not a like for like comparison. The sample is brokers and advisors reporting what they saw, and the numbers say nothing about industry, growth, customer concentration, real estate, inventory or deal terms. The IBBA's own switch from SDE to EBITDA near $2 million is a market convention, not a rule.
Two other data points sit at the edges. BizBuySell, an online marketplace for businesses for sale, reported a median sale price of $350,000 in the third quarter of 2026, up 17 percent from a year earlier. Its closed deals are reported voluntarily by participating brokers, so coverage may be incomplete, and the release does not explain the size of the price change, so do not read it as a trend in value.
At the far end, the 2026 Stanford search fund study reported a median purchase price of $16 million for companies acquired in 2024 and 2025. That covers traditional search funds only and is much larger than the typical small business purchase.
Treat all of these as context. In short, a multiple is what similar businesses sold for, as reported by someone, at some point. It is not what your business is worth.
Why do size, industry and risk change the multiple?
Advisors commonly say buyers pay more for earnings they trust and can finance, and that larger businesses often have more managers, more customers and more financing options. Within each measure, the published bands above show multiples rising with size, though that is not proof of cause. Beyond size, buyers and appraisers look at risk and potential. The table lists factors that advisors commonly say move a multiple. These are tendencies advisors describe, not effects measured in the surveys above, and the direction can differ by industry and deal. Ask your valuation professional.
| Factor | Tends to support a higher multiple | Tends to pull it lower |
|---|---|---|
| Owner dependence | Managers and systems run the business | Customers and know-how sit with the owner |
| Customer concentration | Many customers, none dominant | One or two customers drive most revenue |
| Revenue pattern | Recurring contracts or repeat demand | One-off projects, heavy seasonality |
| Earnings trend | Stable or growing, well documented | Falling, volatile or poorly documented |
| Asset needs | Light on equipment and capital spending | Heavy equipment, deferred maintenance |
| Industry | Demand and margins buyers find durable | Cyclical demand or thin margins |
Deal terms matter too: a headline price paid partly as a seller note or earnout is not the same as one paid in cash (see seller financing and earnouts).
Limits to state whenever you quote a multiple:
- It depends on which earnings measure was used.
- The published sets rely on voluntary or survey reporting.
- It ignores time, leverage and risk.
- The price may or may not include real estate, inventory or assumed debt.
- It only helps compare businesses of similar risk and size.
How do you get from net profit to SDE and EBITDA, and what is one add-back worth?
Because the price is a multiple of earnings, every adjustment is multiplied. A $10,000 add-back at 3 times is $30,000 of price. That is why add-backs are where buyers and sellers argue, and why a quality of earnings review tests each one.
A hypothetical example. Here is the full walk. A shop reports $300,000 of net profit. The owner takes a $120,000 salary, runs $20,000 of personal expenses through the business, had a $10,000 one-time cost, and the books show $30,000 of interest and depreciation. A replacement manager would cost $90,000. The multiples are illustrative round numbers. They are not drawn from the IBBA table and are not market data.
| Step | Amount |
|---|---|
| Net profit | $300,000 |
| Add interest and depreciation | +$30,000 |
| Add owner's salary | +$120,000 |
| Add personal expenses and the one-time cost | +$30,000 |
| SDE | $480,000 |
| Subtract a market-rate replacement manager | -$90,000 |
| Adjusted EBITDA | $390,000 |
A seller quoting 3.0 times SDE is asking $1,440,000 (3.0 x $480,000). A buyer who plans to hire a manager and thinks in terms of 3.5 times EBITDA is offering $1,365,000 (3.5 x $390,000). The two numbers look far apart as multiples and are close as prices. If the $20,000 of personal expenses turn out to be real business costs, SDE falls to $460,000 and the 3.0 times price falls by $60,000. Mixing the two measures is a common way for a buyer to think a price is cheap or expensive when it is neither.
What other methods do appraisers use?
Multiples are shorthand. The SBA lists five ways to value a business: capitalized earnings, excess earnings, cash flow, tangible assets and specific intangibles, and says there are "many different methods to determine a fair price." In plain words (definitions vary by appraiser):
| Approach | Idea in plain words | Sometimes considered when (general tendency) |
|---|---|---|
| Capitalized earnings | Turns one measure of expected annual earnings into a value using a required rate of return | Earnings are stable |
| Excess earnings | Values the assets, then treats earnings above a fair return on them as goodwill | Both assets and goodwill matter |
| Cash flow | Values expected future cash flows | Cash flows are forecastable |
| Tangible assets | Adds up what the equipment, inventory and property are worth | The business is asset heavy, or as a floor |
| Specific intangibles | Values particular intangible assets such as a customer list, brand or license | Value rests on one identifiable asset |
Which method fits is the appraiser's judgment.
If you use an SBA 7(a) loan for a change of ownership, the lender must obtain an independent business valuation from a credentialed appraiser, requested by and prepared for the lender. The lender may do its own valuation if the business purchase price is $350,000 or less, unless buyer and seller are closely related. If the price is above the valuation, the difference must be covered with additional buyer funds, which can include debt on full standby within the SBA's limits on that source. Ask your lender how it counts. Outside the SBA program, you and your lender decide the approach. Either way, an appraisal gives one opinion, and a buyer's advisor, a seller's broker and a lender's appraiser can reasonably land in different places.
Where does insurance show up in a business valuation?
Insurance sits inside the earnings number and around it.
- Premium inside earnings. Insurance is an operating expense. If the seller carried a thin program, earnings look better than they will under you, and every dollar of the gap is multiplied. See the seller was underinsured, so true EBITDA is lower.
- Losses the seller absorbed. Deductibles, self-insured retentions and claims the seller paid out of pocket can be a recurring cost of risk that earnings hide. Unreported or open claims are a separate diligence item (see loss runs). See insurance in your quality of earnings review.
- The savings lever. If insurance cost falls without cutting coverage you need, earnings rise, and a later buyer may apply a multiple to that. See insurance savings as an EBITDA lever. Savings are not promised.
- Loss history. A clean record can help the next buyer's view of risk. See how a clean loss history raises your exit value.
Before you finalize a price, ask what a program that fits the business may cost. A quote is not coverage, and a carrier's terms depend on underwriting, but it gives your model more than a guess. Morrow can review the seller's policies and request quotes.
What should you ask before you rely on a valuation?
- Which earnings measure is this multiple applied to, SDE or EBITDA, and how is the owner's pay treated?
- Which add-backs are in the number, and what evidence supports each one?
- What is included in the price: real estate, inventory, cash, assumed debt, working capital?
- What does the number assume about the seller's role after closing?
- Where does the comparison data come from, who reported it, and what size and industry does it cover?
- Who prepared the valuation, for whom, and is it independent of the seller?
These are questions for your accountant, your lender and your valuation professional. Morrow is an insurance agency and does not give valuation, tax or financing advice. For the next steps in the deal, see seller financing and earnouts and the due diligence checklist.
Keep reading
- What Is a Quality of Earnings Report?
- Insurance Savings as an EBITDA Lever: What a Lower Premium Is Worth
- The Seller Was Underinsured, So True EBITDA Is Lower
- Due Diligence Checklist for Buying a Small Business
- How Much Cash Do You Need to Buy a Business?
- All guides for new business owners
Frequently asked questions
What is the difference between SDE and EBITDA?
SDE adds back one working owner's pay and perks, so it shows what an owner-operator earns. EBITDA sets the owner's pay at the cost of a replacement manager, so it shows what the business earns for an owner who does not run it. For the same business, SDE is usually higher by about the cost of that manager. Definitions vary by advisor.
What multiple do small businesses sell for, and is three times SDE a good one?
It depends on size, industry, risk, terms and which earnings are being multiplied. In the IBBA's second quarter 2026 survey, deals under $500,000 were reported at about 2.0 times SDE, deals of $500,000 to $2 million at about 2.8 to 3.1 times SDE and deals of $2 million to $5 million at about 4.0 times EBITDA. So three times SDE is within the published range for deals of that size, but that says nothing about whether the SDE itself holds up. These are survey figures from brokers and advisors, not a price for your business.
Why do buyers use EBITDA instead of SDE?
Larger deals and many lenders start from EBITDA because it treats the person running the business as a cost. SBA debt service coverage for change of ownership loans is measured on EBITDA, and the lender may adjust for items such as seller discretionary expenses and ownership compensation. Ask your lender which adjustments it will make.
Can I value a small business myself?
You can estimate, and the numbers in this guide help you ask better questions. But an appraiser gives an opinion of value, the price is negotiated between you and the seller, and if you use an SBA 7(a) change of ownership loan, the lender must obtain an independent valuation by a credentialed appraiser.
Does insurance affect what a business is worth?
It can. Insurance is an operating cost inside earnings, so an underinsured seller can overstate earnings, and recurring losses the seller absorbed can hide a cost of risk. Loss history also shapes how the next buyer sees the business.
What if the price is higher than the valuation?
In an SBA 7(a) change of ownership loan, if the price exceeds the valuation, the difference must be covered with additional buyer funds, which can include debt on full standby within the SBA's limits on that source. Ask your lender how it counts. Outside the SBA program, your lender and investors decide how to treat the gap.
References
- IBBA and M&A Source: Market Pulse Q2 2026 Highlights (posted August 2026)
- CoStar Group: BizBuySell Releases Q3 2026 Insight Report (October 20, 2026)
- Stanford Graduate School of Business: Search Funds Keep Offering a Proven Path to Ownership (July 13, 2026)
- U.S. Small Business Administration: Buy an existing business or franchise (valuation methods)
- U.S. Small Business Administration: SOP 50 10 8.1, Appendix 15, business valuation and debt service coverage (effective October 1, 2026)
- Morgan & Westfield: Acquired, Ch. 4, Calculating EBITDA, and Ch. 5, Advantages and Disadvantages of Multiples (2026)
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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.