If you’ve ever tried to read about how businesses are valued, you’ve probably seen words like multiples, EBITDA, or SDE and thought, “Wait, what does that even mean?”
You’re not alone. Most small business owners didn’t start their business because they love financial talk. You started a business because you’re good at what you do, you delivered value to your customers, and over time, you have done well for yourself.
Now, you want to pass on your legacy to another buyer, while receiving some well-earned financial payoff for decades of hard work, and people are bombarding you with all these financial terms. Confused?
That’s why we made this guide. Instead of throwing tough definitions at you, we’ll break down these big words using simple, everyday stories, the kind you could share at your kitchen table. Think of apples, lemonade stands, or cleaning your room.
Understanding these terms isn’t just for bankers or accountants. If you’re selling your business, it helps you know what it’s worth and how to talk about it. If you’re buying, it helps you see what you’re really getting for your money.
Let’s take away the confusion, keep it easy, and explain everything like you’re five. By the end, “Multiples, EBITDA, and SDE” won’t sound tricky at all; they’ll just make sense.
Multiples: The Price Tag Multiplier
Think of multiples as a way of putting a price tag on earnings.
If a business earns $10 and the multiple is 3, the valuation is:
$10 × 3 = $30.
If another business also earns $10 but has a multiple of 5, its value jumps to $50. Same earnings, different price.
Why? Because a multiple reflects more than the money coming in today. It shows how attractive the business looks to a buyer — things like steady sales, strong margins, or a reliable team. The safer and more promising the business looks, the more buyers are willing to pay for every dollar it earns.
Key Point: Multiples are the “price tag multiplier” that turns earnings into business value — and the stronger the business, the higher that multiplier goes.
EBITDA: The Clean Profit Picture
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
That’s a mouthful, but here’s the easy way to think about it:
EBITDA is like cleaning your messy room. When the floor is covered with shoes, clothes, and boxes, it’s hard to see how big the room really is. Once you clear the clutter, you finally see the true space.
In the same way, EBITDA clears away things that don’t reflect your day-to-day business performance, like loan payments, taxes, or accounting adjustments. What’s left is a clean picture of the profit your business actually generates from its regular activities.
Why It Matters
EBITDA matters because it helps buyers and investors compare businesses fairly. It strips out the “noise” from loans, taxes, and complex accounting rules, leaving a clear picture of the core profit a business generates.
A Simple Example
Let’s say your business earned $500,000 last year. Out of that, you had:
- $50,000 in loan interest
- $100,000 in taxes
- $40,000 in depreciation (equipment losing value)
- $10,000 in amortization (spreading out the cost of a big expense over time)
If we “add back” all those items, here’s the calculation:
$500,000 + $50,000 + $100,000 + $40,000 + $10,000 = $700,000
That $700,000 is the clean profit picture — the number buyers care about, just like seeing your room after the clutter has been cleared away.
While EBITDA gives a clean profit picture, small businesses often use another measure: SDE.
SDE: The Owner’s Take-Home Plus Perks
EBITDA is a common measure for businesses of all sizes, but SDE is especially useful for owner-operated small businesses. That’s because it adds back the salary, perks, and personal expenses that reflect the true benefit to the owner.
What It Means
SDE is essentially Business Profits + Owner’s Salary (sometimes) + Perks + Add-Backs
It represents the total financial benefit an owner gets from running the business, not just profit, but also their compensation, perks, and expenses that wouldn’t carry over to a new owner.
Adding back the owner’s salary is often the most debated part, but a simple nuance is:
- If the business can run without hiring a replacement for the owner, the owner’s salary is often added back.
- But if a new owner would need to hire an operator or GM to take over those responsibilities, then part (or all) of the salary may not be added back, since it’s a real expense for the business to function.
A Simple Example
Imagine you run a lemonade stand:
- You make $1,000 selling lemonade.
- Lemons and sugar cost $300.
- That leaves $700 profit.
- You also drink $50 worth of lemonade yourself (a perk).
- Plus, you paid yourself $200 for running the stand.
Your SDE is $700 (profit) + $50 (perk) + $200 (salary) = $950.
It’s the true benefit of owning the business, the profit plus your personal compensation and perks.
Why It’s Common in Small Businesses
In small businesses, the owner does almost everything, serves customers, leads the team, and takes a salary or perks. When a buyer looks at the business, they want to know:
“If I take over, how much money could I put in my pocket?”
That’s why SDE is often used to value businesses earning about $1M to $5M in revenue, the stage where many owners begin planning an exit.
How They Work Together in Valuation
When buyers figure out what a business is worth, they use a simple formula:
Business Value = Earnings × Multiple
The only difference is which “earnings” you use:
- SDE for owner-operated businesses (where the owner’s salary and perks matter).
- EBITDA for businesses with established teams or investors (where operations run without the owner).
Here’s an easy way to see the difference:
| Metric | Best For | Example |
| SDE (Seller’s Discretionary Earnings) | Owner-operated businesses where the owner’s salary, perks, and add-backs matter | Profit: $200K + Owner’s Salary: $100K + Perks: $20K = $320K SDE |
| EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) | Businesses with management teams or investors, where operations run without the owner | Profit: $200K + Interest: $20K + Taxes: $30K + Depreciation: $10K + Amortization: $5K = $265K EBITDA |
When Should You Use SDE or EBITDA to Value a Business?
A big question for sellers and buyers is: “Should I use SDE or EBITDA to figure out what this business is worth?”
The answer depends on who’s running the business and how it’s set up.
Think of it this way: SDE captures the full financial benefit to an owner-operator (profits, salary, perks, and personal add-backs). EBITDA strips all that away to show the business as if it were run by professional management. The right measure depends on how the business is operated, and how a buyer would need to operate it going forward.
Quick Example:
(a) A plumbing business where the owner answers the phone, manages jobs, and takes perks through the business → SDE makes sense because a buyer wants to know what the current owner really takes home.
Note: Running a trade business and thinking about your exit? Here’s a clear path for plumbing business owners planning a sale.
(b) A marketing agency with a management team, where the owner is not involved day-to-day → EBITDA makes sense because it reflects the transferable, stand-alone profit of the company.
Note: To see how this plays out in real life, check out what buyers look for when valuing a B2B marketing agency.
(c) A $10M HVAC business with a full team, but the owner still takes a large salary and runs personal expenses through the books → buyers may look at both SDE and EBITDA, then adjust for what would realistically change post-sale.
Bottom line: Use SDE if the business depends on the owner. Use EBITDA if it can run without them.
Why This Matters for Buyers and Sellers
These concepts aren’t just financial jargon, as they help both sides of a deal think more clearly about value.
For Buyers:
- You can compare different businesses easily.
- You’ll know when a price is fair or when something in the numbers doesn’t add up.
- You can see if the business works well as a team, or if it relies mostly on the owner.
For Sellers:
- You’re ready to set a price that buyers will really consider.
- You can explain the value confidently, using clear numbers.
- You avoid disappointment because your price is based on what the market expects.
Wrapping Up
Multiples, EBITDA, and SDE might sound tough at first, but really, they’re just ways to figure out: “What is this business worth?”
- Multiples show how much buyers pay for business earnings.
- EBITDA gives a clear profit picture for businesses that run independently of the owner.
- SDE shows the true earning power for smaller, owner-operated businesses. Many family-run businesses fall into the owner-operated category. If that’s you, check out our guide on how to sell your family business the right way.
Together, these ideas help everyone estimate value simply and plan clearly, whether you’re buying or selling.
Where AA24 Holdings Fits In
At AA24 Holdings, we’re more than just numbers people. We care about the people, systems, and legacy behind a business. Whether you’re simply curious about value or seriously considering your next step, we’re here for an honest conversation.
📩 If you’d like to explore what a fair, legacy-minded buyer looks for, reach out:
