Business Valuation Multiples by Industry: How SDE and EBITDA Multiples Work
How SDE and EBITDA multiples are used to value small businesses, what drives a multiple up or down, and illustrative examples across common industries.
Ask a broker what a small business is worth and you will usually hear a multiple: "these trade at around three times SDE." Multiples are a convenient shorthand, but they are also easy to misuse. A multiple only means something when you know which earnings it applies to, how those earnings were adjusted, and what else is included in the price.
This guide explains how multiples work and what moves them. It does not publish industry multiples as market data. The examples below are hypothetical illustrations of how the math works, not verified transaction statistics. For current comparables, ask a broker, an accredited valuation professional, or a lender who has seen recent deals in the industry.
How a multiple works
The earnings measure is usually SDE for owner-operated businesses and EBITDA for larger businesses with management in place. The two are not interchangeable: SDE includes one owner’s compensation, while EBITDA treats a market-rate manager salary as an expense. A business can be described as "3x SDE" and "4x EBITDA" at the same price. Our SDE vs. EBITDA guide walks through the conversion.
What the price includes
Brokers often quote a multiple on a price that includes normal working capital or inventory but excludes cash and real estate. Two businesses at the same multiple can cost very different amounts if one includes $150,000 of inventory and the other does not. Always confirm what the multiple covers.
What drives a multiple up or down
| Factor | Tends to support a higher multiple | Tends to support a lower multiple |
|---|---|---|
| Size of earnings | Larger, more stable earnings | Small earnings dependent on one person |
| Owner dependence | Management team runs operations | Owner is the key salesperson and technician |
| Revenue quality | Recurring or contracted revenue | Project-based or one-time revenue |
| Customer concentration | No customer over 10% of revenue | One or two customers dominate |
| Growth trend | Consistent growth | Declining or volatile results |
| Records | Clean books that tie to tax returns | Large unsupported add-backs |
| Transferability | Licenses, leases, and contracts transfer easily | Key relationships or licenses are personal to the owner |
| Capital needs | Low ongoing capital expenditure | Heavy equipment replacement |
Size matters more than many buyers expect. Larger businesses usually command higher multiples because they are less dependent on one person, attract more buyers, and qualify for more financing options.
Illustrative examples across common industries
The table below shows how the same framework can produce different values for hypothetical businesses. Multiples are invented for illustration and reflect the factors above, not any data source.
| Hypothetical business | Earnings | Illustrative multiple | Illustrative value | Why the multiple differs |
|---|---|---|---|---|
| Residential HVAC, service agreements, two crews | $450,000 SDE | 3.2x SDE | $1,440,000 | Recurring maintenance revenue; owner manages but does not do all service work |
| Owner-run landscaping, seasonal | $220,000 SDE | 2.2x SDE | $484,000 | Owner does sales and supervises crews; seasonal cash flow |
| B2B managed IT services, monthly contracts | $900,000 EBITDA | 5.0x EBITDA | $4,500,000 | Contracted recurring revenue; management team in place |
| Single-location restaurant | $180,000 SDE | 1.8x SDE | $324,000 | Owner-dependent; lease and labor risk |
| Specialty distributor, top customer 35% of sales | $600,000 EBITDA | 3.5x EBITDA | $2,100,000 | Customer concentration reduces the multiple |
Multiples, financing, and what a business can carry
A price is only achievable if it can be financed. In an SBA deal, total debt is limited to the business valuation, and the lender must see adequate debt service coverage. A price that implies a high multiple may simply not cash flow. Check any multiple against the payments it would require.
Our SBA deal structures guide shows how equity and seller notes change the payment side of that equation.
Other valuation methods
- Discounted cash flow: values projected cash flows, more common for larger businesses.
- Asset-based: values tangible assets, relevant when earnings are weak or the business is asset-heavy.
- Comparable transactions: uses recent sales of similar businesses; this is where multiples come from.
SBA lenders generally require an independent business valuation from a qualified source for change of ownership loans, so the multiple a broker quotes will eventually be tested.
How to use multiples as a buyer
- Confirm which earnings measure the multiple uses, and recalculate it yourself. See how to calculate SDE and how to calculate EBITDA.
- Confirm what the price includes: inventory, working capital, equipment, real estate.
- Compare the business against the factors table, not against a headline industry number.
- Test the price against debt service and your equity.
- Validate add-backs in due diligence before relying on the multiple.
When you contact brokers, stating your target earnings range in the right metric shows you understand valuation. A BuyerPass profile lets you set acquisition criteria by revenue, SDE, and EBITDA so brokers can match you to businesses that fit.
Sanity-checking a multiple against debt service
A multiple tells you what a business might sell for. It does not tell you whether the business can pay for itself after you buy it. A quick debt service check connects the two. Hypothetical assumptions: SDE of $350,000, a reasonable owner salary of $100,000, $100,000 of working capital and costs, a 10% equity injection, and an SBA-style loan at 10.5% over 10 years.
| Illustrative multiple | Price | Loan (90% of project) | Annual debt service | Coverage on $250,000 |
|---|---|---|---|---|
| 2.5x SDE | $875,000 | $877,500 | About $142,100 | About 1.76x |
| 3.0x SDE | $1,050,000 | $1,035,000 | About $167,600 | About 1.49x |
| 3.5x SDE | $1,225,000 | $1,192,500 | About $193,100 | About 1.29x |
| 4.0x SDE | $1,400,000 | $1,350,000 | About $218,600 | About 1.14x |
Hypothetical annual debt service as the multiple rises
- $142k2.5x SDE$142,100, About 1.76x coverage
- $168k3.0x SDE$167,600, About 1.49x coverage
- $193k3.5x SDE$193,100, About 1.29x coverage
- $219k4.0x SDE$218,600, About 1.14x coverage
Lenders set their own coverage requirements, and many want a meaningful cushion above 1.0x. In this example, the jump from 3.0x to 4.0x adds $350,000 to the price and leaves very little room for a bad year. That is why buyers who finance a deal often find the realistic price ceiling is set by coverage rather than by industry comparables.
Common mistakes when using multiples
- Applying an EBITDA multiple to SDE, which overstates value because SDE still includes the owner's compensation.
- Comparing multiples without checking what the price includes, such as inventory, real estate, or working capital.
- Relying on a single comparable sale or an online average without adjusting for size, risk, and growth.
- Accepting the seller's add-backs before they are documented. The multiple is only as good as the earnings it is applied to.
- Ignoring financing. A price the business cannot service is not a good price, whatever the comparables say.
Frequently asked questions
Where do brokers get their multiples?
Brokers draw on databases of reported transactions, their own closed deals, and industry experience. Those sources vary in coverage and definitions, which is one reason the figures in this article are illustrative rather than market data.
Should I use SDE or EBITDA multiples?
Owner-operated businesses are usually priced on SDE; larger businesses with management in place are usually priced on EBITDA. Our guide to SDE vs. EBITDA explains how to choose and how to convert between them.
Can a higher multiple ever make sense?
Yes, when the earnings are more durable: recurring contracts, diversified customers, a management team that stays, or clear growth. Confirm those features in due diligence before paying for them.
Sources and references
Confirm transaction-specific requirements with your broker, lender, and advisors.
- IBBA: Business brokerage glossary (opens in a new tab)Business brokerage terminology for SDE, EBITDA, and valuation.
- SBA SOP 50 10: Lender and Development Company Loan Programs (opens in a new tab)SBA requirements for independent business valuations and debt limited to valuation in change of ownership loans.
- SEC: Non-GAAP financial measures, Section 103 (opens in a new tab)How non-GAAP measures such as EBITDA are defined and presented.
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The BuyerPass Editorial team writes practical guidance for business buyers, brokers, and sellers. Articles are educational and are not legal, tax, lending, or investment advice.