Under $1M, Your Business Is Priced on SDE, Not EBITDA

An owner works through his paperwork at his desk, because buyers price the earnings he can document.

A 2025 profile of Nashville landscaper Bryan Clayton shows how much one earnings line can move a sale price. When he sold Peach Tree Landscapes to competitor Landscapes USA in 2013, the landscaping norm was 6x SDE. As that 2025 profile tells it, his first figures showed only $500,000 of annual SDE, too low for the price he wanted. So, the 2025 profile recounts, he went through the books line by line, documented over $150,000 of additional SDE ($100,000 of it from lifestyle add-backs), and at 6x that added $1 million to his asking price.

Nobody changed the business. They changed the arithmetic. Clayton's own review of the experience was "I was absolutely scarred from going through this," which may be the most honest five-star review a sale process has ever received.

That story is the whole method in miniature. Acquidex, a company that sells an SDE calculator, makes the point in its own 2026 explainer: "the multiple is only as honest as the SDE underneath it." Most owners never test their SDE. Many replace the multiple with hope. A 2021 broker estimate put 80% to 90% of businesses on the market as probably overpriced, so hope is clearly popular. It just isn't a valuation.

What is SDE, and why does it replace EBITDA below $1M?

Seller's discretionary earnings, or SDE, is EBITDA plus one working owner's pay and perks. It measures what a full-time owner who buys your business can expect to pull out.

Before you multiply anything, answer three questions in order:

1. Does one owner work full time in the business, doing a job someone would otherwise have to be paid for?
2. Is your most likely buyer a person who will run it, rather than a company that will install a manager?
3. Are your annual earnings under roughly $1 million?

Three yeses mean SDE is your number. BizWorth's 2026 valuation guide puts the formula plainly: SDE = EBITDA + one owner's compensation. In its example, a company with $250,000 of EBITDA after paying its working owner $150,000 shows $400,000 of SDE. Only one owner gets added back. If your business partner also works there full time, that second salary stays an expense. Sorry, partner.

Why does the market bother with a second earnings figure at all? Because of who shows up to buy. Writing for BizBuySell in 2022, appraiser Sheila Spangler of Murphy Business Sales pointed out that the "cash flow" in business-for-sale ads "isn't really cash flow." It is normalized SDE. She added that an SDE multiple is typically smaller than an EBITDA multiple, yet both should land near the same value for the same company. Her warning is worth taping to the fridge: "Just don't apply the EBITDA multiple to the SDE earnings and vice versa."

Once earnings pass roughly $1 million, the buyer pool shifts. Private equity firms and buyers who plan to install professional management lean on EBITDA, since they will pay someone to do your job. Below that line, the buyer usually is that someone.

The common assumption is that SDE is just a small-business nickname for EBITDA. It answers a different question entirely. Out of SDE, the new owner has to cover take-home pay for their family, business taxes, equipment replacement (depreciation was added back, after all), payments on the acquisition loan, and some return on the cash they put in. That is a lot of jobs for one pile of money. So SDE multiples run lower. Combining 5 sources points to the same rule: the earnings figure follows the buyer, and the buyer sets the multiple.

This is where I start with owners. Modern Wealth works across eight defined planning service areas spanning retirement, investment, cash flow, risk, estate, tax, education, and business advisory, so I treat SDE as one input to your whole plan rather than a scoreboard. The structure of the eventual deal matters too, which is why I'd read up on asset sale vs stock sale tax tradeoffs before anyone quotes you a price. First, though, you need to see why the big EBITDA numbers in the headlines were never yours to borrow.

What multiple does a small owner-run business actually sell for?

Most owner-run businesses under $1 million in earnings sell for about two to three times SDE, sometimes four. Manufacturing and wholesale can run a little higher.

Jacob Orosz, president of the M&A firm Morgan & Westfield, lays out the split cleanly: most small businesses sell for two to four times SDE, while mid-sized companies trade at three to six times EBITDA. His size examples do the rest. A business with $100,000 of SDE at a 3.0 multiple asks $300,000. One with $5 million of EBITDA at 5.0 is worth $25 million, and $100 million of EBITDA at 8.0 reaches $800 million. Same arithmetic. Very different neighborhoods.

Notice that the small-business column is not only lower. So work out first which kind of buyer you are likely to attract, because that decides which column applies to you. Comparing a 3 in the left column to a 5 in the right one is comparing apples to a fruit basket.

Closed-deal data from one large for-sale marketplace pointed the same way in 2022: an average SDE multiple of 2.58 on a median sale price of $340,000, with most popular sectors averaging between 2 and 3.3. Those were the marketplace's own self-reported figures, but they sit right inside Orosz's range. Public-company tables quoting 15 or 20 times EBITDA are useful for one thing only: seeing which industries investors like. The next section walks through where that gap comes from.

Within the band, risk decides where you land. Orosz puts it simply: "Your multiple is a reflection of how risky a buyer perceives your business to be." Recurring revenue, a believable growth plan, and an owner who is not holding every client relationship push the multiple up. One giant customer, thin records, or margins that only work because you skip lunch push it down. In a 2026 r/businessbroker thread, one commenter flagged 35 to 50% margins as "very high" for a small service business, a sign the owner may be supplying more labor than the books admit.

Buyers and sellers also rarely agree on the number itself. The same thread observed that "If Buyer thinks they are paying 4x and Seller thinks they are receiving 3x, they may still be close enough on value for a deal to happen." I find that oddly comforting. Nobody has to win the argument about the multiple, as long as the cash works for both sides.

And the cash is where retirement planning starts to get honest. A larger sale year can ripple into taxes and even Medicare costs, which is why I walk owners through how a business sale triggers an IRMAA bill long before they sign anything. The multiple gets you a price; the next question is how much of that price you actually get to live on.

How do you turn an SDE valuation into a realistic retirement number?

Start with the sale price, subtract taxes and any money paid to you over time, then add assets you own outside the deal. What remains is your retirement capital.

That is a less exciting number than the headline price. It is also the only one your grocery bill accepts. Modern Wealth's specialized focus is business owners and exit and value-maturity planning, and this subtraction is where nearly every one of those conversations ends up. Here is the order I work through it with an owner:

1. Rebuild SDE from your tax returns, not from a seller's summary, and strip out add-backs you cannot document.
2. Apply a multiple from your size band and industry, not from a headline.
3. Estimate the tax bill on the sale with your CPA, since the deal structure changes it.
4. Split the price into cash at closing versus money paid later through a seller note or earn-out.
5. Add back what you keep separately, such as a building you own and lease to the buyer.

Step one trips up more people than step five. One buyer described a listing in 2024 that showed SDE of around $230,000 to $250,000 while the owner reportedly drew only about $30,000 a year. The gap might be perfectly innocent, with profits taken as distributions. It might also be personal expenses run through the business. A buyer will want to know which, and so should you, because every rejected add-back gets multiplied on its way out of your price.

Liam Keegan, who wrote in 2025 about buying and selling small tech companies, put the cost bluntly: writing off $100,000 in personal expenses costs $500,000 at a 5x multiple. He also noted that buyers typically weight the last three years at 50%, 30% and 20%, most recent first. So the clean-up has to happen early. In 2025, Keegan recommended preparing "AT LEAST two years in advance" of going to market, and he estimated an independent valuation at $10,000 to $30,000.

Step four deserves its own warning. Money paid over time is not money in your account. It depends on the buyer running your business well, which is a strange thing to bet your retirement on. Contracts help here. Investment banker Dave Kauppi said in 2018 that the greater the share of your revenue on contracts, the higher both your value and your cash at closing. One buyer of a client's IT firm valued managed services contracts at "a dollar 27 on the dollar," against "ten cents on the dollar" for one-off hardware and software resale.

I can't give you a statistic for how far owners' hopes drift from defensible values; nobody has published a clean one for businesses this size. What I can say is that a plan built on step five's leftovers is far less stressful than one built on step two's optimism. It also helps to build savings outside the company while you still own it, and new comparability plans for older owners are one way to do that before the buyer ever calls.

What should a small owner do before a buyer runs the numbers?

Treat the SDE multiple as the price buyers will actually use, not the one you hope for, and spend the years before a sale making each dollar of earnings easier to believe.

For small, owner-run companies, I expect the multiple to keep tracking risk far more than ambition. A buyer paying roughly two or three years of your earnings is really asking one question: will those earnings still show up once you leave? That is a fair question. It also has a fixable answer.

Investment banker Dave Kauppi described a buyer's formula in 2018 that valued revenue by how it arrived, with break-fix work counted at "sixty three cents on the dollar." Same dollar. Different confidence. His simpler test was this: "on January first when you turn on the lights, you want to know where your revenue is coming from."

Nobody has yet tallied how far small owners' own estimates land from a defensible number, and I won't pretend to know it. So start with the figure a buyer would write down, then work backward to the one your retirement needs.

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