How Small Businesses Are Valued: EBITDA Multiples and Seller's Discretionary Earnings
October 21, 2026
Valuing a private business is part science and part negotiation. Several approaches exist: asset-based (what the assets are worth), income-based (discounted future cash flows), and market-based (what similar businesses sold for). In practice, small and mid-sized business sales are often priced using a multiple of earnings. Two measures dominate: seller's discretionary earnings (SDE) for very small owner-operated businesses, and EBITDA for larger ones.
A simple example: a company earning $500,000 of EBITDA that sells at a multiple of 4 to 6 would be priced between $2 million and $3 million.
Skip the math and get your answer instantly:
Open the NPV Calculator →SDE vs. EBITDA
EBITDA is earnings before interest, taxes, depreciation, and amortization, a proxy for operating cash flow. SDE adds back the owner's salary and perks to EBITDA, showing the total benefit available to one owner-operator. A business with $150,000 of EBITDA after paying the owner a $90,000 salary has SDE of $240,000, ignoring other adjustments. SDE multiples for small businesses often range from about 2 to 3.5, while EBITDA multiples for companies with professional management and more than a few hundred thousand in earnings commonly run 3 to 6 or more.
Always make sure you know which measure a quoted multiple refers to.
| Business size | Earnings measure | Typical multiple range |
|---|---|---|
| Under $500k earnings, owner-operated | SDE | 2.0 - 3.5 |
| $500k to $2 million | EBITDA | 3.0 - 5.0 |
| $2 million and up, strong management | EBITDA | 4.0 - 8.0 or more |
Normalizing Earnings
Buyers adjust reported profit to reflect the true ongoing earning power. Add back one-time expenses (a lawsuit settlement), non-business expenses run through the company (personal car, family travel), and above-market owner compensation. Subtract the cost of a market-rate manager if the owner's work would have to be replaced. Adjust rent if the owner owns the property and charges below-market rent. These adjustments can change the valuation by hundreds of thousands of dollars, so document each one.
What Raises or Lowers the Multiple
Higher multiples go to businesses with growing revenue, recurring revenue, diversified customers, strong margins, a documented management team, low owner dependence, defensible competitive position, and clean financial records. Lower multiples come with customer concentration (one customer providing 40% of sales), cyclical industries, heavy capital needs, key-person risk, and messy books. Interest rates and market conditions matter too: higher rates reduce what buyers can pay.
To increase value before a sale, work on the drivers for a year or more: build recurring contracts, reduce your role in daily operations, and clean up the financials.
Cross-Checking With Discounted Cash Flow
A multiple is a shortcut for the value of future cash flows. A buyer paying 4 times EBITDA with a 5-year payback expects, roughly, a 25% pre-tax return on their investment if earnings stay flat. Discounted cash flow valuation estimates future cash flows and discounts them at a rate reflecting risk, commonly 15% to 30% for small businesses. For flat cash flow of $500,000 in perpetuity at a 20% discount rate, the value is $500,000 ÷ 0.20 = $2.5 million, which is consistent with a multiple of 5.
Get Professional Help
For a sale, purchase, divorce, or tax purpose, hire a qualified business appraiser or broker. Terms of sale also affect value: asset sale versus stock sale, seller financing, earn-outs, and working capital adjustments. This article is educational and not valuation or investment advice.
Frequently Asked Questions
What is EBITDA?
Earnings before interest, taxes, depreciation, and amortization.
What is SDE?
Seller's discretionary earnings: EBITDA plus the owner's salary and perks, representing total benefit to one owner-operator.
What multiple should I use for my business?
It depends on size, growth, risk, and industry. Typical ranges are 2 to 3.5 times SDE for small businesses and 3 to 6 times EBITDA for larger ones.
How can I increase my business's value?
Grow recurring revenue, diversify customers, reduce owner dependence, and improve financial records.
Is a multiple the same as a valuation?
It is a shortcut. A full valuation considers assets, cash flows, risks, and deal terms.