Small businesses are priced on SDE — seller’s discretionary earnings, which adds back the owner’s own salary. Larger businesses are priced on EBITDA, which doesn’t; it assumes a hired manager instead. The cutoff sits around $2M of deal value, and because the two earnings figures are built differently, an SDE multiple and an EBITDA multiple are never directly comparable.
The multiple climbs with deal size, but it isn’t one continuous scale — the earnings basis switches from SDE to EBITDA partway up. Here’s the ladder, with the basis called out at every tier.
| Deal size | Basis | Typical multiple |
|---|---|---|
| Under $500K | SDE | ~2.0× |
| $500K – $1M | SDE | ~2.8× |
| $1M – $2M | SDE | ~3.3× |
| $2M – $5M | EBITDA | ~4.0× |
| $5M – $50M | EBITDA | ~5.3× |
IBBA Q3-2025 multiple ladder. The median small business that actually sold went for roughly $350,000 at about 2.61× SDE (marketplace, self-reported data — not a census) — below the popular “3–5x” rule of thumb most buyers assume going in.
SDE starts from net profit and adds back everything that benefits one owner-operator — their own salary, personal perks run through the business, interest, depreciation, and amortization. EBITDA adds back the same interest, taxes, depreciation, and amortization, but leaves the owner’s salary out, because it assumes a hired manager is running the business and that manager’s pay is a real, ongoing cost. That missing salary add-back is the entire difference between the two figures. Whichever figure your deal is quoted on, it started life the same way — pulled from the broker’s CIM, the packet built to present the business’s earnings in the most flattering light the underlying numbers can support.
Because SDE keeps the owner’s pay inside the earnings number, SDE earnings are always the larger figure for the same business. And since price is just earnings × multiple, a larger earnings figure needs a smaller multiple to land on the same dollar value — which is exactly why the ladder above shows SDE multiples sitting at 3.3× or under, while EBITDA multiples run 4.0–5.3×. A seller or a broker’s CIM that quotes a flattering “EBITDA multiple” on a business that should really be priced on SDE — or the reverse — is handing you a number built on a different base, not a better one.
Take a business generating $600,000 a year in owner earnings. Priced correctly, that’s enough to land the deal at the very top of the $1M–$2M SDE tier — just $20,000 of deal value under the $2M mark where the basis flips to EBITDA. That’s exactly the zone where mixing up the two multiples does the most damage.
$420,000 gap — the mistaken price runs about 21% above what the business is actually worth on its correct SDE basis, for the exact same $600,000 of underlying earnings. Nothing about the business changed; only which multiple got matched to it.
This mix-up is the single most common valuation mistake a first-time buyer makes, and it’s an easy one to avoid once you know to ask which basis a quoted multiple is built on before you compare it to anything — then pull the real earnings number yourself instead of taking the CIM’s headline figure on faith. For the full mechanic — including everything else that pushes a multiple up or down, plus a free estimator — see the complete guide to business valuation.
SDE (seller’s discretionary earnings) is the total cash benefit to one full-time owner-operator: net profit plus the owner’s salary, perks, interest, depreciation, and amortization, all added back. EBITDA adds back the same interest, taxes, depreciation, and amortization — but not an owner’s salary, because it assumes a hired manager runs the business instead. That missing salary add-back is the entire difference between the two figures.
It comes down to size. Small, owner-operated businesses — roughly under $2M of deal value — are priced on SDE. Larger, manager-run businesses above that are priced on EBITDA. Per the IBBA Q3-2025 ladder: SDE at ~2.0x under $500K, ~2.8x for $500K–$1M, and ~3.3x for $1M–$2M; EBITDA takes over at ~4.0x for $2M–$5M and ~5.3x for $5M–$50M.
Because they’re multiplying different-sized numbers. SDE earnings include the owner’s own salary, so they’re always the larger figure for a given business; EBITDA earnings don’t, so they’re smaller. Since price is just earnings times multiple, the smaller EBITDA figure needs a bigger multiple to land on the same dollar value. A “5x” EBITDA multiple and a “5x” SDE multiple describe very different businesses — comparing the two headline numbers without checking the basis is an apples-to-oranges mistake.
The price comes out wrong, usually inflated. Take a business earning $600,000 a year: priced correctly as SDE at the $1M–$2M tier’s ~3.3x multiple, it’s worth $1,980,000. Apply the EBITDA-tier ~4.0x multiple to that same $600,000 instead — treating an SDE figure as if it were EBITDA — and the price jumps to $2,400,000, roughly 21% too high: a $420,000 gap for identical underlying earnings. The earnings didn’t change; only which multiple got matched to them did, which is why the basis has to be checked before any two multiples get compared.
Because a CIM is a marketing document built by the seller’s side to make the business look as attractive as possible, not a neutral financial statement. A business marketed at “4.0x” sounds inexpensive next to larger companies trading at 4–5x EBITDA — which is exactly why it’s worth checking whether that 4.0x is genuinely an EBITDA multiple, or is being applied to a larger SDE figure that should really carry a smaller multiple instead. The fix isn’t distrusting every number in the CIM; it’s confirming which basis its multiple is built on before comparing it to anything else.
The median small business that sold went for roughly $350,000 at about 2.61x SDE (marketplace, self-reported data — not a census), well under the popular “3–5x” rule of thumb. Multiples climb with size from there, per the IBBA Q3-2025 ladder: ~2.0x under $500K, ~2.8x for $500K–$1M, ~3.3x for $1M–$2M, then ~4.0x EBITDA for $2M–$5M and ~5.3x for $5M–$50M.
Essentially, yes — for a business small enough that either figure could apply, SDE runs higher than EBITDA by roughly the owner’s market-rate salary, since that’s the add-back EBITDA leaves out. It’s not an exact conversion, since real add-back lists vary deal to deal, but it’s why the two multiples can never be swapped in for each other without first adjusting the earnings base.
DealStratum surfaces the deal. Bring a verified SDE or EBITDA number — on the right basis for the size — to the table before you negotiate.