Three different earnings numbers get quoted in MSP deals, they can differ by hundreds of thousands of dollars for the same business, and buyers switch between them depending on your size. If you’ve heard “we pay 4x” from one buyer and “we pay 2.5x” from another, there’s a fair chance they weren’t disagreeing about your value. They were multiplying different numbers.
So here are the three, defined plainly, with one example business carried through all of them.
Meet our example: a $2.2M revenue MSP, twelve employees, owner works full time as the GM and part-time senior engineer. The P&L shows $310k of net income. The owner pays herself a $180k salary, runs a $14k truck through the business, has the family’s phones on the company plan ($4k), and last year absorbed a one-time $22k legal settlement over a departed employee’s non-compete.
SDE: what the business pays its owner
Seller’s discretionary earnings answers this question: if one owner-operator ran this business, how much total benefit would flow to them in a year?
The math starts with net income and adds back everything the current owner takes out, plus interest, taxes, depreciation, amortization, and true one-time expenses:
Net income $310,000
+ Owner salary $180,000
+ Owner truck $14,000
+ Family phone plan $4,000
+ One-time legal settlement $22,000
= SDE $530,000
(We’re leaving interest, depreciation, and amortization at zero to keep the example clean. In your business they’d be added back too.)
SDE exists because small-business buyers are usually buying a job plus an asset. An individual buying a $500k-SDE shop plans to work in it, so the salary they’d otherwise pay a manager is money in their own pocket, and it’s fair to count it as part of the return. SDE is the standard yardstick roughly below $700k to $1M in earnings, and it’s the number most business brokers quote.
EBITDA: what the business earns as a standalone machine
EBITDA asks a colder question: what does this business produce if nobody gets anything for free, including management?
For a small company, the honest version subtracts a market-rate salary for the work the owner actually does. Our owner runs the company as GM and covers senior escalations. Hiring those functions would cost, say, $160k in her market. So:
SDE $530,000
- Market-rate replacement $160,000
= EBITDA $370,000
Same business, same year, and the number just moved $160k. Neither figure is wrong. They answer different questions, and the gap between them is exactly the cost of the owner’s labor.
EBITDA becomes the yardstick when buyers don’t intend to work in the business: private equity firms, platforms, strategic operators like us. Somewhere around $1M in earnings the market fully switches over, and with it the multiples change too, which is why comparing “2.5x” and “4x” across the SDE/EBITDA line is comparing prices in two currencies.
Adjusted EBITDA: the number deals actually price on
Almost no deal prices on raw EBITDA off the P&L. It prices on adjusted EBITDA: the same figure, normalized for things that won’t continue under new ownership.
Adjustments run both directions. In the seller’s favor: one-time costs (our $22k settlement), personal expenses (truck, phones), above-market rent paid to the owner’s own building LLC, a family member on payroll who doesn’t really work there. Against the seller: below-market rent that will reset after the sale, an underpaid family member who does real work and will need a market wage, revenue recognized aggressively, expenses that were deferred to dress up the year.
For our example, the truck, phones, and settlement were already handled in SDE, so adjusted EBITDA stays $370k. But suppose she also pays herself $30k under-market rent through her building LLC. A buyer will subtract the difference:
EBITDA $370,000
- Rent normalization $30,000
= Adjusted EBITDA $340,000
Each adjustment needs documentation to survive diligence, and the difference between a claimed addback and a proven one is real money. That topic deserves its own post, and it gets one later in this series.
Which number applies to you
A rough guide, honestly held:
- Under roughly $500k SDE: you’ll be quoted SDE multiples, most buyers are individuals or small firms, and your owner workload is priced into the deal.
- Roughly $500k to $1M: the ambiguous middle. Some buyers quote SDE, some quote EBITDA, and part of your negotiation is which yardstick applies. A business with a real management layer earns the right to be measured on EBITDA, and it’s worth arguing for.
- Over roughly $1M EBITDA: you’re an EBITDA business, quoted EBITDA multiples, and buyers will scrutinize whether the management team underneath you actually runs the place.
Notice what that middle band implies. The same $700k of owner benefit gets multiplied at maybe 3x as SDE or, presented as a $550k adjusted EBITDA with a real GM in place, at maybe 4.5x or better. Building the management layer that moves you from one column to the other is among the highest-return projects available to an owner with a couple of years of runway, and it’s a core piece of the pre-sale work we help owners do.
Three habits, starting now
First, compute all three numbers for your own business this week. It takes an afternoon with your P&L and it means no buyer’s quote will ever confuse you again. Second, when anyone quotes you a multiple, ask “of what?” before you react. The answer matters more than the multiple. Third, keep receipts for anything you’d want added back someday. Future you, sitting in diligence, will be grateful.
For the bigger picture of what drives the multiple itself, start with what an MSP is actually worth. And if you’d rather work through your numbers with someone who prices businesses like yours for a living, that conversation is free and stays at whatever altitude you’re comfortable with.