EBITDA vs SDE: Which Earnings Number Matters for Your Phoenix Business Sale

The Wrong Earnings Metric Can Cost You Six Figures

When a Phoenix business owner sits down with a broker to discuss valuation, one question comes up almost immediately: "What multiple am I getting?" The honest answer depends entirely on which earnings number you're using—and that decision is not academic. Pick the wrong one, and you've just created a false baseline that could distort negotiations and cloud the entire process.

The culprit is confusion between SDE (Seller's Discretionary Earnings) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Both are legitimate, but they measure different things and apply to different buyer profiles. The practical cutoff in the Phoenix market is clear: SDE rules for owner-operator businesses under roughly $2M in revenue; EBITDA enters when an institutional buyer, management team, or roll-up platform evaluates a manager-run target.

This article explains the distinction, shows you when each applies, and reveals why mixing them up costs sellers.

What Is SDE, and When Does It Apply?

SDE represents the cash profit available to an owner-operator who works in the business. It starts with net income and adds back owner's discretionary expenses—the personal draws, excess vehicles, travel, and owner's salary that a new owner might not incur.

**The SDE formula:** Net Income + Owner's Salary + Owner's Benefits + Debt Service + Non-Recurring Expenses + Owner's Discretionary Expenses − Rent Paid to Related Party

The logic is simple: if you buy this business and step in as the operator, what will you actually take home? A CPA might show a $120K net profit, but if the owner has been running $40K in personal travel through the business, your true discretionary earnings are $160K. That $160K is what a buyer—typically a second owner, a small-business operator, or a semi-absentee investor—will use to calculate what multiple to pay.

SDE applies to service businesses, small retail, contracting, medical practices, salons, consulting, and the vast majority of businesses under $2M in revenue. These are businesses where the owner's presence, effort, and decisions materially affect the bottom line.

According to [Business Valuation Resources' Main Street median multiples](https://www.bvresources.com/), small owner-operated businesses typically trade at 2.5x to 4.5x SDE, depending on industry, growth, recurring revenue, and customer concentration. A landscaping company with $200K in SDE might sell at 3.0x ($600K), while a pest-control business with the same earnings might command 3.5x to 4.0x because of its recurring revenue model.

What Is EBITDA, and When Does It Apply?

EBITDA is an institutional metric. It strips out financing structure and taxes, allowing large buyers (private equity, platform add-ons, multi-unit operators, PE-backed groups) to compare businesses on an apples-to-apples basis, regardless of how they're capitalized.

**The EBITDA formula:** Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA assumes a fully staffed, manager-run operation. The owner may not work in the business at all. It's used for companies with $5M+ in revenue, businesses with professional management structures, and acquisition targets that will be consolidated into a larger platform.

Why the difference? A $200K SDE business that might sell at 3.5x ($700K) is fundamentally different from a $2M EBITDA business selling at 8x ($16M). The first is bought by an owner who will run it; the second is bought by a fund or group that will inject professional management, layer in debt, and extract synergies across multiple units.

The Practical Cutoffs in the Phoenix Market

The boundary is not perfectly sharp, but experienced brokers in the Phoenix market recognize clear zones:

**$500K–$1.5M revenue (SDE-driven):** The buyer is almost always an owner-operator or small investor stepping into the role. SDE is the only rational metric. Most small service, contracting, and retail sales fall here.

**$1.5M–$3M revenue (transition zone):** Some deals still center on SDE if the buyer is an individual; others begin to use EBITDA if a semi-institutional buyer (regional group, emerging platform, or owner-operator stepping up to multi-unit) is in the picture. A broker must ask: who is buying? How many locations do they already own? Will they staff the business?

**$3M+ revenue (EBITDA-driven):** If there's institutional capital, an outside management team, or a roll-up platform, EBITDA is the conversation. SDE becomes irrelevant because the new owner doesn't rely on the seller's personal income contribution.

Why Mixing Them Up Costs Sellers

The danger emerges when an owner-operator applies EBITDA multiples to an SDE business, or vice versa.

**Scenario 1: Owner applies EBITDA to a small business**

A Phoenix owner has $150K in SDE and assumes she should get an 8x multiple (typical for EBITDA businesses) because she read an article about SBA lending or PE multiples. She expects $1.2M. Reality: her buyer is an owner-operator, not a PE fund. The market multiple is 3.0x to 3.5x SDE, which means $450K to $525K. When offers come in at that level, she feels blindsided.

**Scenario 2: Buyer applies SDE to a management-run business**

A platform acquirer looks at a $3M-revenue business with $800K EBITDA and tries to pay 3.5x SDE (if there were an owner operator). That math doesn't work—the business is professional, recurring, and scalable. The seller will reject it because institutional buyers and other platforms are offering 6x to 8x EBITDA. The deal collapses over a valuation mismatch rooted in using the wrong metric.

The cost isn't always a failed deal. Often, it's misaligned expectations, longer negotiations, more due diligence friction, and lower final prices because the seller started from a false anchor.

How the Multiple Stack Changes

To illustrate: suppose a Phoenix medical practice nets $200K annually and has no owner's discretionary add-backs. Below is how the valuation changes by metric:

- **SDE approach:** $200K × 3.5x = $700K - **EBITDA approach (same earnings, institutional buyer):** Add back depreciation ($20K), interest ($15K), taxes on $200K (~$50K, assuming self-employment) → EBITDA ≈ $285K × 6.5x = $1.85M

The same business, same earnings, dramatically different price. Why? Because the first buyer is an individual practitioner who will work there; the second is a platform that will layer in efficiencies, add locations, and refinance.

A Broker's Rule of Thumb

"The key is asking one simple question: will the buyer replace the owner or keep the owner running it?" says Eddy Roche, Associate Broker at HUB AZ Brokers | Sunbelt Business Brokers. "If the buyer is stepping in to operator the business, you're talking SDE and a 2.5x to 4.5x multiple. If the buyer is bringing in management, you're in EBITDA territory and the multiple jumps significantly."

Picking the Right One for Your Deal

Before you discuss multiples with a buyer or broker, ask yourself:

1. **Who will buy this business?** An individual stepping in, or an institutional group? 2. **Does the business have professional management, or does it rely on the owner?** 3. **Is there a management team that stays after the sale?** 4. **What is the revenue level, and is there owner's discretionary income to add back?**

If you're selling a service business, contracting firm, or small retail operation under $2M in revenue to an owner-operator, SDE is your metric. If you're selling a professionally staffed, multi-unit, or $3M+ operation to a buyer with institutional capital or a platform ambition, EBITDA is the conversation.

Getting this right before the LOI is drawn shapes every negotiation that follows. The Arizona business brokers at BizSalesGuy.com work with owners and buyers daily to ensure the earnings metric matches the buyer profile and the actual deal economics—because a misaligned valuation derails sales before they ever gain momentum.