When buying or selling a business, one of the most common terms you’ll hear is “multiples of earnings.” These multiples—often based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or SDE (Seller’s Discretionary Earnings)—are essential for determining how much a business is worth. But what do they actually mean, and how should buyers and sellers use them?
What Are Multiples of Earnings?
Multiples are simply a way of valuing a business based on its earnings. Instead of guessing what a business is worth, brokers and buyers use standardized formulas. For example, if a business makes $200,000 in SDE and the industry multiple is 2.5x, the estimated valuation would be $500,000.
👉 Learn more about the process in our guide on How Are Small Businesses Valued?
EBITDA vs. SDE: What’s the Difference?
EBITDA is commonly used for larger businesses and reflects earnings before interest, taxes, depreciation, and amortization. It provides a cleaner picture of profitability without owner-specific expenses.
SDE is often used for small to mid-sized businesses. It includes the owner’s salary and discretionary expenses, showing the total financial benefit available to a single owner-operator.
Both methods are useful, but knowing which one applies to your situation is key.
What Influences the Multiple?
Multiples aren’t fixed. They depend on factors such as:
Industry trends (some industries are more attractive to buyers).
Size of the business (larger businesses often get higher multiples).
Growth potential (buyers will pay more for future earnings).
Owner involvement (an absentee-run business can often fetch a higher multiple).
For more details, check our blog on Key Metrics That Increase Your Business Value.
Why Multiples Matter for Buyers and Sellers
For buyers: Understanding multiples helps you spot whether a business is overpriced or a great deal.
For sellers: Knowing your multiple helps you prepare your business for sale and maximize its value.
Final Thoughts
Multiples of earnings aren’t just numbers—they represent how the market views your business. Whether you’re planning to buy, sell, or simply increase the value of your company, knowing how EBITDA and SDE work gives you an advantage.
👉 Ready to explore opportunities? Browse businesses for sale or learn how to sell your business.
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