Most valuation content talks about EBITDA. But if you're a first-time buyer looking at Main Street businesses — the size range most acquisition-course graduates actually target — the market prices those deals on SDE. It's not a simplified EBITDA. It's a different calculation with a different assumption baked in.
SDE in one line
That's the core build-up. In full, it also adjusts for one-time items:
- Add back one-time, non-recurring expenses (a legal settlement, a relocation, a bad-debt write-off).
- Subtract one-time, non-recurring income (an insurance payout, a one-off asset sale, an unusually large single contract) — this is the side first-time buyers most often forget.
The part that actually matters: SDE vs. Adjusted EBITDA
Both start the same way — net income, plus interest, plus depreciation and amortization. Where they diverge is the owner's paycheck:
- Adjusted EBITDA adds back only the above-market portion of the owner's salary. The assumption: a market-rate manager keeps running the business after the sale, and that manager's pay stays a real cost.
- SDE adds back the owner's entire compensation and benefits. The assumption: a single owner-operator buyer steps into that role themselves, so their full pay becomes part of what they're buying.
A worked example
Building SDE from the P&L
Notice this business would land in the $500K–$1M IBBA price band — still squarely SDE territory. If the same business had a much larger owner comp add-back and crossed roughly $2M in implied value, the right move is to re-check the number on an EBITDA basis instead, since that's the measure the market actually uses at that size.
Two wrinkles that trip up first-time buyers
More than one owner drawing a paycheck
SDE assumes one replaceable owner slot. If a business has two owners both taking compensation, only one owner's pay typically gets the full add-back — the other's is a judgment call, not an automatic addition. Don't add back every owner's full salary and assume the total is defensible.
A paid manager already runs the place
If the business already employs a non-owner general manager who runs day-to-day operations, that person's salary stays a real cost — it does not get added back. A business that doesn't depend on the owner personally is also a meaningfully different (and often more valuable) acquisition than one where you'd be stepping into daily operations yourself.
SDE multiples by industry
| Industry | Median SDE multiple |
|---|---|
| Car washes | 4.99× |
| IT managed services | ~3.28× |
| Manufacturing | 3.03× |
| Home healthcare | 3.00× |
| HVAC (small) | ~2.81× |
| Retail / trades / professional services | 2.5–2.6× |
| Food & restaurants | 2.24× |
Run the numbers on a real deal
Use the free calculator to get an instant SDE-based estimate on a business you're evaluating, or create a free account for the full add-back checklist and report.
Frequently asked questions
What does SDE stand for?
Seller's Discretionary Earnings — the standard measure used to value US Main Street businesses, roughly those under $2M in value.
How do you calculate SDE?
SDE = Net income (pre-tax) + Interest + Depreciation & Amortization + Owner's total compensation and benefits + one-time non-recurring expenses − one-time non-recurring income.
Why is SDE lower or higher than EBITDA for the same business?
SDE adds back the owner's entire compensation; Adjusted EBITDA only adds back the above-market portion and assumes a paid manager continues running the business. SDE is a bigger earnings number, paired with a lower multiple — the two are not directly comparable line for line.
Does every US business use SDE?
No. Businesses under roughly $2M in value are typically priced on SDE; above that, the market shifts to EBITDA, assuming a market-rate manager stays in place.
Related: US business valuation calculator · How to buy a business with no money · How to value a business (EBITDA method).