The market multiple applied to each valuation method is different, so you have to select one method and apply it consistently throughout the purchase process. It doesn’t work to calculate EBITDA (which is normally much less than SDE) and then apply a SDE multiple to value the business; this would result in purchase prices much lower than the market. Conversely, applying an EBIDTA market multiple to a SDE calculated business will result in a price it is much higher than the market. When calculated properly, EBITDA and SDE valuation methods are typically close in value. SDE is the more widely used valuation method for small business transactions, including by SBA lenders.
The more practical way to decide between EBITDA or SDE is the nature of the business and the owner’s role in it. In most typical small business purchases, the owner is also an operator or active general manager of the business. In this situation, the buyer must consider the entire pot of benefits to the owner, and apportion them as money to live, benefits, loan service, and return on investment. In the sale of most small businesses, the buyers will be owner operators and the market price will be based on SDE. In larger business, with more tiered staffing and where the owner is not in an active managerial role, the Buyer is more often looking at the business as an investment. The better measure of the return on the investment in these circumstances tends to be EBITDA.