Understanding Multiples in Small Business Valuation

When it comes time to value a small business - whether for a sale, acquisition, or internal planning - the two most common financial metrics used are EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) and SDE (Seller’s Discretionary Earnings). Both represent measures of a company’s earning power, but they are used for different types of businesses and result in different valuation ranges.

Understanding multiples in small business valuation is essential for buyers and sellers alike.

1. EBITDA Multiples: What They Are and When They’re Used

EBITDA is the most widely used financial metric for valuing established, mid-market, and larger small businesses, particularly those with professional management in place. It normalizes earnings by removing financing and non-cash accounting decisions, making companies easier to compare.

Typical EBITDA Multiples

While multiples vary significantly by industry, size, growth, and risk, a broad market range for small and mid-sized businesses is typically:

• Lower middle-market businesses ($1–5M EBITDA): 3× to 6× EBITDA

• Larger middle-market businesses ($5–20M EBITDA): 6× to 9×+ EBITDA

• High-growth or strategic industries (software, medical, technology): 8× to 15×+ EBITDA

What moves EBITDA multiples higher?

• Recurring revenue models

• Strong year-over-year growth

• Diversified customer base

• Documented systems & management team

• High margins compared to industry peers

What pushes multiples lower?

• Customer concentration

• Key-person dependence

• Declining revenue or margins

• Limited market share or weak competitive position

• Geographic concentration

EBITDA multiples generally apply to businesses that aren’t totally dependent on the owner’s day-to-day involvement. See our blog to learn more about EBITDA.

2. Seller’s Discretionary Earnings (SDE) Multiples: Ideal for Small, Owner-Operated Businesses

SDE represents the total financial benefit to a single owner-operator. It adds back one owner’s salary, personal or discretionary expenses, and one-time costs. Because most small businesses rely heavily on the owner, SDE provides a clearer picture of money the buyer can expect to take home.

Typical SDE Multiples

For small, owner-operated businesses (usually under $1M in profit), typical SDE multiples look like:

• Microbusinesses (<$250K SDE): 1.5× to 2.5× SDE

• Small businesses ($250K–$500K SDE): 2× to 3× SDE

• Larger small businesses ($500K–$1M SDE): 3× to 3.5× SDE

• High-demand industries (HVAC, plumbing, e-commerce, niche manufacturing): 3× to 4× SDE

Drivers of higher SDE multiples

• Strong, stable cash flow

• Clean financials

• Staff and systems that reduce owner dependence

• Low customer concentration

• Strong local or niche market reputation

What lowers SDE multiples

• High owner involvement

• Unreliable bookkeeping or unverified add-backs

• Declining earnings

• Highly seasonal or volatile revenue

• Customer or supplier concentration

SDE multiples rarely exceed 4× except in cases where the business is semi-absentee or particularly attractive to strategic buyers. See our blog to learn more about SDE.

3. EBITDA vs. SDE Valuation: Which Should You Use?

Company Type	Best Metric	Why
Owner-operated small business (<$1–2M revenue)	SDE	Reflects total income available to an owner
Growing small to mid-sized business ($2M–$10M revenue)	EBITDA	More normalized and comparable across industries
Privately held mid-market or Private Equity-backed business	EBITDA	Aligns with investor standards and acquisition models
Businesses with multiple partners or managers	EBITDA	Removing owner-specific adjustments produces clearer valuation

Rule of thumb:

• Use SDE multiples when a business is dependent on one owner.

• Use EBITDA multiples when the business operates like a true company with a management team.

See our blog to learn more about when to use EBITDA vs. SDE.

4. Why Multiples Vary So Much

Valuation is as much about risk and transferability as it is about profit. Two companies with identical earnings can trade at very different multiples depending on:

• Growth prospects

• Competitive advantages

• Industry desirability

• Operational maturity

• Customer diversification

• The quality of systems and staff

• Transition risk to a new owner

Multiples reflect not just how much the company earns today, but how reliable those earnings will be for the buyer going forward.

5. The Importance of Adjusted Financials

Whether using EBITDA or SDE, the starting number must be accurate. Buyers will always scrutinize:

• Addbacks

• Owner compensation

• One-time or non-recurring expenses

• Personal expenses

• Related-party transactions

• Normalization adjustments for rent or salaries

Clean, well-documented financials typically increase multiples because they reduce perceived risk. Finance Burger can help. Contact us to learn how.

Final Thoughts on Understanding Multiples in Small Business Valuation

Whether you’re preparing to sell, acquiring a company, or simply benchmarking your operation, understanding how these multiples work can help you set realistic expectations and negotiate from a position of knowledge. EBITDA and SDE multiples are critical tools for valuing a business, but they’re only one part of the equation. A precise valuation considers industry benchmarks, growth trends, risk factors, and normalized financials. Consider using a professional certified in business valuations to get the best understanding of your business’s value.