SDE Multiple

How the SDE multiple is calculated, and what the price actually buys

The arithmetic is trivial; the definitions underneath it are not. Business price divided by SDE gives the multiple, and SDE times the multiple gives the price. A business with $500,000 of recast SDE priced at a 3.0x multiple carries an asking price of $1,500,000. The same business at 2.5x is $1,250,000 and at 3.5x is $1,750,000. A full turn of multiple is $500,000 of price on a business this size, which is why the multiple absorbs more negotiating attention than any other number in the deal.

The multiple is applied to one earnings figure, not to a history. Most brokers apply it to the most recent full fiscal year or to a trailing twelve months figure, and some apply it to a weighted average that leans on recent years. Which one was used has to be stated, because 3.0x quoted on a weighted three-year average is a materially different price than 3.0x on the best year inside that average.

What the multiple-derived price includes is a matter of local convention rather than mathematics, which is why it belongs in the letter of intent rather than in a footnote. On a typical Main Street asset sale the price derived from the SDE multiple buys furniture, fixtures, equipment, the customer list, the trade name, the phone number, goodwill, and the going concern. In most markets it excludes cash and accounts receivable, which the seller keeps while paying off the accounts payable; it excludes real estate, which is leased or purchased separately at appraised value; and it treats saleable inventory at cost as an addition on top of the price rather than as something the multiple already paid for. Note that this convention means the Main Street SDE multiple is not an enterprise-value multiple in the strict lower-middle-market sense, because the working capital accounts sit outside it.

Typical ranges and what moves a business up or down the band

Directionally, and recognizing that industry, geography and vintage move these materially, US SDE multiples as of 2026 tend to sort by earnings size:

• Under $250,000 of SDE: roughly 1.5x to 2.5x. Buyers are mostly individuals buying themselves a job, and the pool of lenders willing to underwrite the file is smaller.
• $250,000 to $500,000 of SDE: roughly 2.0x to 3.0x. The size range where SBA 7(a) acquisition lending is most routine.
• $500,000 to $1,000,000 of SDE: roughly 2.5x to 3.5x. Several buyer types compete here, including small search funds.
• Above $1,000,000 of SDE: 3.0x and up, and buyers increasingly stop quoting SDE at all and switch to an EBITDA multiple, because they intend to hire a manager rather than run the business themselves.

These bands are practitioner convention, not measured fact. The transaction datasets brokers cite for comparables are the BizBuySell Insight Report and the IBBA and M&A Source Market Pulse survey. Both are self-reported and lagging, so a multiple quoted from either should name the edition and quarter it came from.

The value drivers that actually move the number

Within a size band, the spread is explained by the transferability of the earnings, not by the earnings themselves. The factors buyers and lenders price hardest are how much of the revenue walks out the door with the owner; customer concentration, where a single customer above roughly 20 percent of revenue draws a discount and one above 40 percent frequently kills the deal outright; whether revenue is recurring or contracted; whether a licensed or hard-to-replace employee is required to operate; the remaining term and assignability of the lease; the three-year revenue trend and margin stability; the quality of the books; and whether the business is financeable at all. A business no lender will finance gets priced at a cash multiple, which typically sits a full turn below the financeable equivalent. The concentration thresholds above are underwriting rules of thumb rather than a standard, and individual credit policies differ.

What practitioners get wrong about the SDE multiple

The multiple is an output, not an input. It is routinely presented as an observed market fact, but small-business comparable data is thin, self-reported and lagging. The honest framing is that the multiple is a judgment about the quality and transferability of earnings, and that comp data is a sanity check on that judgment rather than its source.

Add-back leverage is the most underappreciated arithmetic in the room. At a 3.0x multiple, every dollar of defensible add-back is worth three dollars of price. Moving SDE from $500,000 to $540,000 with $40,000 of documented owner-benefit add-backs moves the price at 3.0x from $1,500,000 to $1,620,000, which is $120,000 of value produced by $40,000 of expense. The leverage runs both directions, which is why a buyer's quality of earnings work attacks the add-back schedule before it attacks the multiple: killing that same $40,000 is a $120,000 retrade. A recast padded with add-backs that cannot be traced to a source document is a $120,000 liability rather than a $120,000 asset.

An SDE multiple and an EBITDA multiple are not interchangeable, and quoting one against the other is the most common valuation error on the boundary between Main Street and the lower middle market. SDE is struck before the compensation and benefits of a single full-time owner-operator; conventionally computed adjusted EBITDA is struck after the fully loaded market cost — salary, payroll taxes and benefits — of a manager for that role. Because that cost is a positive number, the same business at the same price will show a higher EBITDA multiple than SDE multiple, every time.

A multiple no bank will finance is not a market multiple. On a deal expected to close with SBA 7(a) debt, the debt service coverage ratio at the proposed price is the binding constraint. If the resulting coverage falls below roughly 1.15x, which is the business-level minimum SBA 7(a) lenders generally cite from SOP 50 10, the price is a number on a page rather than an offer anyone can close.

Then there is the inventory double-count. If the SDE figure covers a year in which inventory was drawn down to boost cash flow, and the buyer is separately paying for inventory at cost on top of the multiple, the seller is being paid twice for the same asset.

Where the SDE multiple surfaces in a live deal

The multiple gets set once, ratified once, and attacked twice. It is set when the broker prepares the opinion of value and the confidential information memorandum. It is ratified when the buyer signs a letter of intent at a stated price, which fixes an implied multiple whether or not anyone writes it down. It is attacked first when the lender underwrites and re-derives cash flow available for debt service, and again during due diligence when the buyer's accountant re-examines the add-backs the SDE was built on. A broker who can trace every add-back to a specific line on a specific page of a tax return or profit and loss statement gives up far less multiple in those last two conversations than one who cannot.

Where this shows up in CastBack

CastBack computes SDE from the broker's recast and multiplies a representative SDE — a simple or year-weighted average across the years in the recast — by a multiple the broker types in; it never suggests, derives, or benchmarks the multiple itself. See how a recast is produced.

Related terms

• Seller's Discretionary Earnings (SDE)
• EBITDA Multiple
• Debt Service Coverage Ratio (DSCR)
• Add-Back