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.
The deal includes the building, not just the business
SDE multiples price the operating business — they don't assume real estate is part of what you're buying. If the seller also owns the building the business runs from, that's typically valued separately (by appraisal, not by multiplying it into your SDE number), and it comes with its own tax wrinkle worth knowing about: if the seller wants to defer their gain on the real estate through a Section 1031 like-kind exchange, the sale proceeds for that property have to pass through a neutral third party, which generally rules out the seller also carrying financing on that same piece. If real estate is a meaningful part of the price, treat "value the business" and "value the building" as two separate exercises — see our guide to structuring the deal for how this plays out when you're also trying to minimize cash at closing.
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).