When someone says "a 4x business", they mean the sale price is roughly 4 times a specific earnings figure. Whether that earnings figure is SDE (Seller's Discretionary Earnings) or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) matters enormously — and switching between them can double or halve the implied value.
SDE vs. EBITDA — the practical difference
SDE is the earnings available to a single owner-operator. It adds back the owner's salary, benefits, and perks, plus any non-recurring or non-cash items. It's the metric used for SMB deals — roughly, businesses selling for under $3M.
EBITDA assumes professional management is already in place. It doesn't add back the owner's replacement salary — because a professional buyer will hire that manager. EBITDA is the metric used for lower-middle-market and middle-market deals — roughly, businesses selling for over $3M.
The practical rule of thumb: below about $1M in owner earnings, expect SDE-based pricing. Above about $1M, expect EBITDA-based pricing (with an implicit GM salary already deducted).
An example
Consider a $2M revenue HVAC business that generates $500K in net income. The owner takes a $150K salary and runs $50K of personal expenses through the business. Non-recurring items total $20K.
- SDE = $500K + $150K + $50K + $20K = $720K
- EBITDA = $500K + $50K + $20K − $80K (GM replacement) = $490K
At the same business, at industry-typical multiples: SDE at 3.5x = $2.5M. EBITDA at 5.0x = $2.45M. In this case, both metrics point to roughly the same enterprise value — which is typical when the transition from SDE to EBITDA is done correctly.
What actually moves the multiple
Most owners think the multiple is set by their industry alone. It isn't. Industry sets the base range. Eight business-specific factors move you up or down inside (and past) that range.
Financial quality
Cash-basis QuickBooks is a discount. CPA-reviewed statements are neutral. Audited statements or a completed Quality of Earnings report is a premium. Buyers price in the diligence risk of your books.
Growth rate
Trailing-twelve-month growth is the single most-scrutinized metric in diligence. 20%+ growth commands a meaningful premium. Declining revenue commands a steep discount and often triggers earn-out structures.
Recurring revenue
The most durable driver of a premium multiple. A pest control business at 80%+ contract-based recurring revenue can trade at 8–10x EBITDA. The same-size business at 20% recurring might trade at 5x.
Customer concentration
Top customer above 20% of revenue is a red flag. Above 35% is a severe discount. The math: buyers price in the probability of losing that customer post-close.
Owner dependence
The most transferable business is one the owner doesn't touch. If you work 15 hours a week and can vacation for a month without disruption, buyers pay materially more. If the business can't run without you, buyers price in a replacement GM salary — and hedge that further by discounting.
Management depth
Bench matters. A GM plus 2–3 department heads is worth 5–10% on the multiple versus an owner-only operation.
Documented processes
Written SOPs reduce diligence risk. They also make the first-year transition dramatically smoother, which buyers price in.
Tenure
15+ year operating history is a modest premium. Sub-3-year businesses trade at a discount because forecastability is weaker.
The one thing every owner should do
Model your business under both bases. Get a baseline valuation range using our engine, then get a second opinion from a real M&A advisor in your industry. Where the numbers converge is roughly where the market will price you. Where they diverge is where the diligence conversation will happen.
Everything you do between now and going to market is an investment in moving your multiple to the top of the industry range — not in changing the industry range itself.