Valuation conversations tend to stall because the two sides are measuring different things. A seller quotes revenue; a buyer is underwriting earnings. Getting to a common measure early makes the rest of the negotiation far more productive.
Seller's discretionary earnings (SDE)
SDE is used for owner-operated businesses, generally those under roughly two million dollars in earnings. It starts with net income and adds back interest, taxes, depreciation, amortization, one owner's compensation, and legitimate discretionary or one-time expenses. It answers the question: what would the total financial benefit be to an owner who works in the business?
EBITDA
EBITDA does not add back owner compensation, because it assumes the buyer will hire management. Larger businesses and private equity buyers work in EBITDA, and they typically apply higher multiples — but to a smaller number. Comparing an SDE multiple to an EBITDA multiple directly is one of the most common mistakes owners make when they benchmark against a deal they heard about.
What moves the multiple
Two businesses with the same earnings rarely sell for the same price. Recurring revenue, customer diversity, growth trend, quality of records, and how well the business runs without the owner explain most of the spread.