Last updated: 2026-04-13

“`html

SDE vs EBITDA in 2026: SDE (Seller’s Discretionary Earnings) and EBITDA are different profit metrics used in M&A valuations.

What is the Difference Between SDE and EBITDA?

SDE (Seller’s Discretionary Earnings) and EBITDA are different profit metrics used in M&A valuations. SDE includes owner salary, benefits, and one-time personal expenses added back to net income, typically used for businesses valued under $5M. EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) excludes those owner adjustments and is the standard metric for larger deals. For a home services company with $2M net income, $150K owner salary, and $50K personal expenses, SDE would be $2.2M while EBITDA might be $2.05M. Buyers use whichever metric aligns with the business size and their acquisition model. On valuation specifically, our deeper look at SDE vs EBITDA: The Key Metric That Drives Your Sale covers the methodology buyers actually use. On valuation specifically, our deeper look at How to Sell a Custom Millwork Business covers the methodology buyers actually use.

SDE: The Owner-Adjusted Metric

SDE starts with net income and adds back discretionary owner expenses. This includes:

• Owner salary (whether excessive or below-market)
• Owner benefits (health insurance, vehicle, phone)
• One-time personal expenses (travel, meals, dues)
• Non-recurring costs (lawsuit settlements, relocation)

In home services M&A, this matters significantly. A plumbing company owner might pay themselves $200K annually while a buyer could operate with a $100K manager. SDE captures that $100K add-back, reflecting the actual cash available to the new owner. Typical SDE adjustments in home services range from $50K to $300K depending on the business.

EBITDA: The Standardized Approach

SDE vs EBITDA in 2026: SDE (Seller’s Discretionary Earnings) and EBITDA are different profit metrics used in M&A valuations. It represents operating earnings before capital structure and accounting methods distort the picture.

EBITDA is preferred for:

• Larger acquisitions ($10M+ enterprise value)
• PE portfolio companies with multiple add-ons
• Businesses with significant debt or asset bases
• Cross-industry comparisons

Which Metric Gets Used in Home Services M&A?

Business size determines the metric. A 20-person HVAC company generating $3M revenue typically sells on SDE multiples (4-6x SDE). A regional 200-person plumbing platform with $25M revenue uses EBITDA multiples (8-12x EBITDA).

Mixed situations exist. A $8M revenue electrical contractor might be valued at 5.5x SDE ($1.5M) by a search fund, but a PE firm acquiring it as a platform add-on could use EBITDA multiples with different adjustments. The buyer’s acquisition strategy (bolt-on vs. standalone, debt-financed vs. all-cash) drives the metric choice.

The Adjustment Difference

The practical gap: SDE typically runs 5-15% higher than EBITDA for owner-operated home services businesses because it includes legitimate owner compensation that a new owner won’t pay themselves at the same rate. This isn’t manipulation, it’s recognizing different operational structures.

What This Means for You

Knowing which metric applies to your business affects valuation significantly. A $2M SDE company at 5x multiple values at $10M. The same business at 3.5x EBITDA (if EBITDA is $1.8M) values at $6.3M. Before engaging with buyers or advisors, clarify which metric they use and why. CT Acquisitions matches home services owners with buyers using transparent valuation methodologies, ensuring you understand exactly how your business is being evaluated.

Knowing which metric applies to your business affects valuation significantly. A $2M SDE company at 5x multiple values at $10M. The same business at 3.5x EBITDA (if EBITDA is $1.8M) values at $6.3M. Before engaging with buyers or advisors, clarify which metric they use and why. CT Acquisitions matches home services owners with buyers using transparent valuation methodologies, ensuring you understand exactly how your business is being evaluated.

What EBITDA multiples apply by deal size in 2026?

EBITDA multiples for lower middle market businesses vary by size, buyer type, and vertical. The table below shows typical bands for privately-held sellers in 2026 based on GF Data and Axial 2025 benchmarks.

The cutoff: when SDE hands off to EBITDA

There is no rigid line, but the practical cutoff sits between $1M and $2M of earnings. Below $1M, SDE almost always applies: the buyer is typically an individual who will replace the owner and take the full owner benefit as their return. Above $2M, adjusted EBITDA takes over: the buyer is institutional, will hire management, and needs to know what the business earns after paying someone to run it. In the $1M-$2M band, expect buyers to run both numbers and negotiate from whichever framing suits them.

How to calculate SDE

SDE starts with net income and adds back everything that flows to the owner: the owner’s salary and payroll taxes, owner benefits (health insurance, vehicle, phone), discretionary expenses that would not continue under new ownership, interest, taxes, depreciation, amortization, and true one-time costs. The discipline is in the add-back documentation: every add-back needs a paper trail, because buyers challenge the ones they cannot verify.

How to calculate adjusted EBITDA

Adjusted EBITDA follows the same skeleton with one decisive difference: it does not add back owner compensation. Instead, you subtract a market-rate replacement salary for the management role the owner performs. If the owner takes $300,000 and a market-rate general manager costs $150,000, EBITDA only credits the $150,000 excess. That single adjustment is why the same business shows a meaningfully lower EBITDA than SDE, and why quoted multiples on the two metrics are not comparable.

Owner compensation: the single biggest difference

Owner pay drives the largest divergence between the two metrics. SDE treats the entire owner benefit stream as earnings because the individual buyer steps into that seat. EBITDA treats management as a cost of doing business. When you see a business advertised at “4x earnings,” the first question to ask is which earnings: 4x SDE and 4x EBITDA can differ by six figures of price on the same company.

How buyer type decides which metric applies

Who sits across the table shapes the math. Individual buyers using SBA financing plan to run the business themselves, so they underwrite on SDE and lenders size loans against it. Private equity platforms and strategic acquirers will install or retain management, so they underwrite on adjusted EBITDA with a replacement salary baked in. Search funds sit in between and often model both. If your business is near the cutoff, prepare both numbers before going to market: the metric choice is a negotiating lever, not a technicality.

FAQ: Can I Increase My SDE Before Selling?

Yes, legitimately. Documenting recurring owner expenses creates add-backs (health insurance, equipment, professional services). One-time expenses already get added. What doesn’t work: fabricating false expenses or creating items that a new owner would incur anyway. Buyers verify adjustments closely. The best approach: operate cleanly for 2-3 years pre-sale and document everything. Legitimate SDE growth comes from improving margins, not accounting creativity.

“`

Want to Know Your Specific Number?

Every business is different. A quick conversation can give you a real answer based on your specific numbers. Book a Free Consultation Try Our Valuation Tool.

Every business is different. A quick conversation can give you a real answer based on your specific numbers.

Book a Free Consultation
Try Our Valuation Tool

Related Reading

• What Is My Business Worth?
• Sell Your Business, All Industries