The short answer
For most Main Street SMB acquisitions under $5M, the number that matters is SDE — Seller's Discretionary Earnings. For larger deals with professional management or private equity involvement, EBITDA takes over. Here's why the distinction matters and how to use each one correctly.
What the business earns for a single owner-operator who works in the business.
- Includes owner's salary and benefits
- Includes owner's personal perks run through business
- Includes one-time or non-recurring expenses
- Best for owner-operated businesses under $5M
- Used by most Main Street brokers
What the business earns before interest, taxes, depreciation, and amortization — assuming professional management.
- Does NOT include owner's salary addback
- Assumes a professional manager replaces the owner
- Standard metric for deals over $5M
- Used by PE firms and institutional buyers
- What your SBA lender underwrites to
The formula for each
+ Owner's Salary & Benefits
+ Depreciation & Amortization
+ Interest Expense
+ Income Taxes
+ Non-recurring / Personal Expenses
= SDE
+ Depreciation & Amortization
+ Interest Expense
+ Income Taxes
+ Non-recurring Expenses
= EBITDA
A real example
Here's how the same business looks under both metrics — and why it matters for your DSCR calculation.
| Line Item | Amount | SDE Treatment | EBITDA Treatment |
|---|---|---|---|
| Net Profit | $120,000 | Starting point | Starting point |
| Owner Salary | $80,000 | Added back ✓ | NOT added back ✗ |
| D&A | $15,000 | Added back ✓ | Added back ✓ |
| Interest | $10,000 | Added back ✓ | Added back ✓ |
| Taxes | $25,000 | Added back ✓ | Added back ✓ |
| Owner Perks | $15,000 | Added back ✓ | Added back ✓ |
| SDE | $265,000 | What the business earns for you as owner-operator | |
| EBITDA | $185,000 | What the business earns assuming hired management | |
Which one do lenders use?
This is where most first-time buyers get confused. SBA lenders typically underwrite to a modified EBITDA — they add back the owner's salary only to the extent it exceeds a "reasonable manager replacement salary."
Example of lender thinking:
Owner pays themselves $120,000. Lender says a manager for this business would cost $70,000. So they allow a $50,000 addback — not the full $120,000. This is why your lender's DSCR number often differs from what your broker shows you using SDE multiples.
EBITDA multiples by deal size
Asking prices are typically expressed as multiples of either SDE or EBITDA depending on deal size. Here's a general guide:
| Deal Size | Metric Used | Typical Multiple Range | Notes |
|---|---|---|---|
| Under $1M | SDE | 2.0x – 3.5x | Main Street deals, owner-operated |
| $1M – $3M | SDE or EBITDA | 2.5x – 4.5x | Sweet spot for independent searchers |
| $3M – $10M | EBITDA | 4.0x – 6.0x | Lower middle market — managed businesses |
| Over $10M | EBITDA | 5.0x – 8.0x+ | PE territory — different buyer profile |
These ranges are general guidelines only. Multiples vary significantly by industry, growth rate, customer concentration, and market conditions. Consult your broker and M&A advisor for deal-specific guidance.