SDE vs EBITDA: Which Metric Should You Value Your Business On?

Seller’s Discretionary Earnings (SDE) and EBITDA answer different questions. SDE asks: “How much total cash can one owner-operator take out of this business each year?” EBITDA asks: “What is normalized operating profit if management is paid market rates?”

For owner-operated companies typically under about $5M in revenue, buyers and SBA lenders lean on SDE. You start with net income, then add back one owner’s compensation, discretionary perks, and documented one-time expenses. That total is multiplied by an industry SDE multiple — often in the 2.5x–4.0x band for lower middle-market deals.

Once a business has professional management, cleaner books, and institutional buyer interest, EBITDA becomes the primary metric. Multiples expand because the cash flow already assumes market-rate executive pay. In 2026, lower middle-market EBITDA medians commonly sit between about 3.5x and 6.5x depending on sector — with tech and healthcare at the high end and retail/hospitality lower.

The practical rule: if removing the founder collapses revenue or operations, price on SDE and expect a transition discount. If the company runs without the owner day-to-day, price on EBITDA and benchmark against current industry multiples. ExitVelocity’s free calculator runs both lenses so you can see where buyers will land.