Valuation
Should I value my company using EBITDA, SDE, revenue, or comparable transactions?
Which earnings measure fits your company, when revenue matters, and why comparable sales set the multiple rather than replace it.
By Michael D. Rubin, CEO & Founder · September 2026 · 893 words
For most profitable companies with $3 million or more in revenue and a team that does not depend on the owner, adjusted EBITDA is the right measure; SDE fits smaller owner-operated businesses; revenue fits only special cases; and comparable transactions are how you set the multiple for whichever measure you use. They are not four competing methods so much as different tools for different kinds of company.
Using the wrong one can understate your company's value, or overstate it in a way buyers will simply reject. In practice, a professional uses more than one: the right earnings measure, a multiple drawn from comparable transactions, and revenue as a sanity check.
The four measures in plain terms
Each one answers a slightly different question about the business, and the differences matter most when the owner still works in it every day:
- SDE (seller's discretionary earnings): profit before taxes, interest, depreciation and amortization, plus the owner's full salary and benefits and other discretionary costs. It shows what one owner-operator would earn from the business.
- Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization): profit restated after paying a market salary for the role the owner fills. It shows what the business earns for an investor who will hire management.
- Revenue: total sales, which ignores profit entirely.
- Comparable transactions: prices paid for similar companies, expressed as multiples of SDE, EBITDA or revenue.
Which measure fits which company
| Your company | Measure buyers will use | Why |
|---|---|---|
| Smaller, owner works in the business daily, buyer will likely step into the owner's role | SDE | The buyer is buying a job plus a return, so the owner's full pay is part of the value |
| $3M to $100M revenue, profitable, managers in place | Adjusted EBITDA | Buyers such as private equity groups will pay market salaries and price the earnings that remain |
| Fast-growing, subscription or contract revenue, low current profit | Revenue, cross-checked against EBITDA | Current earnings understate what a buyer expects to earn |
| Any company | Comparable transactions | They set the multiple, but only if the comparables are truly similar |
Switching measures is not a free lunch
Owners sometimes want whichever measure produces the biggest number. For the same company, SDE is larger than adjusted EBITDA because it includes the owner's pay, so SDE multiples are lower. Apply an EBITDA-type multiple to SDE and the result is inflated; buyers will spot it and trust the rest of your numbers less. Likewise, a revenue multiple borrowed from a fast-growing software company tells you nothing about a distribution business with thin margins.
The right question is not which number is biggest, but which number the buyers most likely to pay the most will use. For a company in the $3 million to $100 million revenue range, that is usually adjusted EBITDA, and the market most often pays three to seven times it.
There is a simple practical test. Ask who would run the company the day after closing. If the answer is the buyer personally, SDE is probably the right measure. If the answer is a hired manager or your existing team, adjusted EBITDA almost certainly is.
Using comparable transactions well
Comparables are powerful and easy to misuse. A useful comparable is similar in industry, size, profitability, growth and customer mix, and its deal structure is known. A headline multiple that included a large earnout, meaning part of the price paid later only if targets are met, is not the same as a cash price at closing.
Private deal data is limited, so professionals combine several comparables, adjust for the differences and state a range. Our guide on how to compare offers shows why structure matters as much as the headline number, whether you are reading a comparable or an offer of your own.
Owners rarely have access to reliable private transaction data, and what is published is often incomplete. Advisors who close deals regularly see what buyers actually pay, structure included, and that first-hand evidence is often more useful than a database figure with no context.
Where owners get this wrong
These are the mistakes that most often lead to a disappointing first conversation with buyers:
- Using a friend's sale price as a comparable without knowing the structure or the earnings behind it
- Adding back the owner's entire salary in an EBITDA calculation when a buyer must hire someone to do the job
- Relying on revenue alone for a business whose margins are below its industry
- Treating an online rule of thumb as a valuation
- Mixing measures, such as quoting an SDE figure to a private equity buyer that prices on EBITDA
How we decide at MDR & Associates
We look at who the likely buyers are and value the company the way they will. For most of our clients, profitable Texas companies with $3 million to $100 million in revenue in manufacturing, home services, distribution and business services, that means adjusted EBITDA, supported by a detailed recast and a range drawn from the market. If your company sits near the line between SDE and EBITDA, we show you both and explain which buyers will use which. Whatever measure we use is laid out line by line in the recast, so buyers and your CPA can follow every step.
Our business valuation page explains the options, including formal third-party reports. A free valuation snapshot is the quickest way to see which measure applies to you.
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