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Glossary

What is Valuation Multiple?

Also called: earnings multiple, SDE multiple, EBITDA multiple

In one sentence: A business's price or value divided by a measure of its earnings (commonly SDE or EBITDA), used as shorthand to compare businesses and test whether a price is reasonable.

Last updated · Precise SBA editorial

In plain English

A valuation multiple expresses price relative to earnings. If a business sells for $1,500,000 and earns $500,000 of seller’s discretionary earnings, it sold for 3 times SDE. Brokers, buyers and appraisers use multiples to compare businesses of different sizes and to sense-check a price.

Which earnings?

  • SDE (seller’s discretionary earnings) is common for small, owner-operated businesses. It’s earnings before the owner’s pay.
  • EBITDA is common for larger businesses with management in place. It’s after a market salary for whoever runs the business.

The same business has a lower SDE multiple than EBITDA multiple. Mixing them up is one of the most common pricing mistakes.

The limits of a multiple

A multiple is only as good as the earnings it’s applied to. If the earnings include add-backs that won’t survive a lender’s review, the price is inflated before the multiple is chosen. And a multiple says nothing directly about whether the cash flow can carry the debt.

In an SBA-financed purchase, the lender’s independent valuation, not the multiple in the listing, sets the ceiling on debt, and any price above the valuation must be covered by equity.

Hypothetical example

A listing asks $1,800,000 for a business with “$600,000 SDE”: a 3.0x multiple. The buyer’s review supports $500,000 of SDE. At the same 3.0x, that’s $1,500,000. After a $120,000 market salary, EBITDA is $380,000, so the asking price is about 4.7x EBITDA and the supported value about 3.9x. Which multiple is “fair” depends on the business; the arithmetic shows how much the earnings figure matters.

Common mix-ups

  • Quoting a multiple without the earnings measure.
  • Applying a multiple from a different size or industry.

What to do with it

Rebuild the earnings first, then apply a multiple, then test coverage. See how to value a business for an SBA loan.

Common questions

What multiple should I pay for a small business?

There isn't one right number. Multiples vary with size, industry, growth, customer concentration and owner dependence. Test any multiple against what the cash flow can carry after a market salary and the new debt.

Do SBA lenders use multiples?

The lender's independent valuation may use comparable sales, which are often expressed as multiples, alongside other methods. What caps the loan is the valuation's conclusion and the coverage test, not a broker's quoted multiple.

Why is a multiple of SDE lower than a multiple of EBITDA for the same business?

Because SDE is the larger number: it adds back the owner's pay. Dividing the same price by a bigger earnings figure gives a smaller multiple. Always check which measure a multiple is based on.

Related terms

Seller's Discretionary Earnings (SDE)A small-business earnings measure: pre-tax profit plus one owner's compensation and benefits, interest, depreciation, amortization and one-time or discretionary expenses.Add-BacksExpenses added back to reported earnings because they are non-cash, will not continue after a deal, or are personal to the current owner.Quality-of-Earnings (QoE) ReviewAn independent analysis of a business’s earnings that tests whether reported profit is real, repeatable and supported by records.

Go deeper

How a Business Is Valued for an SBA Loan (and What If the Price Is Higher)In an SBA-financed purchase, the price you agree with the seller is only half the story. The lender's independent valuation decides how much of that price can be financed, and the rest has to come from you.Buying a Business with an SBA Loan: How the Financing Comes TogetherAn acquisition loan is underwritten on the business you're buying, and on you. Here's how the pieces fit, in the order they usually come up.

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General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. Rules and lender policies change. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid). Back to the glossary.