Updated September 16, 2026
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When anyone quotes a multiple — a letter from a consolidator, a competitor’s rumored deal, our own EBITDA multiples by industry guide — the multiple is only half the equation. The other half is the earnings figure it multiplies, and that figure is almost never the net income on your tax return. Tax returns are prepared to minimize taxable income; a valuation restates the same business to show its transferable earning power. The restatement runs in both directions: costs that exist only because of you are added back, and costs a buyer will genuinely bear — including a market wage for whatever work you personally do — are charged. Done honestly, the result is the number a rational buyer can actually expect to earn. Done sloppily, it is the number that collapses in diligence and takes the price down with it.
Two standards exist, and confusing them is the most common valuation mistake owners make. Seller’s discretionary earnings (SDE) adds back the owner’s entire compensation and benefits, assuming the buyer will personally step into the owner’s job — the convention for smaller, owner-operated businesses and individual buyers. Adjusted EBITDA instead charges a market-rate salary for the owner’s role, assuming the buyer must hire someone to do that work — the convention for institutional buyers. SDE is therefore always the larger number, often dramatically so. A “3x” on SDE and a “5x” on adjusted EBITDA can describe the same dollars, which is why a multiple means nothing until you know its denominator — and why comparing offers quoted on different bases, without converting them, misleads owners every single day.
A serious add-back schedule has two properties: every item ends with your ownership, and every item carries evidence. The categories that consistently survive diligence:
The standard throughout is the same: an add-back is an argument, and arguments need exhibits. A schedule that arrives with ledger references attached reads as a well-run company; one that arrives as a list of round numbers reads as a negotiation about to go badly.
The indefensible ones share a pattern — they are recurring costs dressed as exceptions: “one-time” repairs that appear every year; marketing spend the business needs to hold its revenue; wages for a family member who does real work someone must still do; “temporary” help present in all three years of financials; and anything without documentation. Padding the schedule with these is worse than useless: when two add-backs collapse under scrutiny, the buyer re-examines the eight that were legitimate, and the discount that follows exceeds anything the padding attempted to gain. Concede the weak items before the buyer finds them — it is both honest and better negotiating.
The add-back schedule sets the denominator; the quality of earnings sets the multiple. Buyers pay up for revenue that recurs under contract or membership, a management layer that runs without the owner, customer diversification, staff who provably stay, and financials that reconcile cleanly — and they discount the reverse. Expect your schedule to be tested: institutional buyers commission a quality of earnings report whose primary job is examining exactly these adjustments. As an orientation, the rule-of-thumb ranges applied to adjusted EBITDA across the sectors we cover:
| Sector | Typical range (× adjusted EBITDA) |
|---|---|
| Insurance agencies | 8–12× |
| Managed IT services / home health | 6–10× |
| Accounting firms / physical therapy | 5–9× |
| Med spas | 4–8× |
| HVAC, plumbing, landscaping | 4–7× |
| Dental practices (by size) | 3.5–8× |
| Lower middle market overall | 3–12× |
Industry rule-of-thumb ranges — the same ranges published in our EBITDA multiples by industry guide and used in our free valuation calculator — not an appraisal of your business.
Read together, the two halves explain the arithmetic that matters most to an owner: at 5x, one defensible dollar of add-back is five dollars of price, and one indefensible dollar is five dollars lost — plus the credibility discount. The schedule deserves the same care as the sale itself.
The practical sequence is simple enough to start this week. Export the full general ledger for the trailing three years — not the summary statements — and walk it line by line, tagging every expense that ends with your ownership. For each tagged item, attach the evidence in the same pass: the payroll record, the invoice, the ledger reference. Then apply the honesty test to each one — would this cost truly disappear under a rational buyer, or does it just have my name on it? — and move anything that fails into a “gray” list you disclose rather than claim. Finally, restate all three years, not just the best one: a consistent adjusted number across time is what convinces; a single adjusted year is what gets discounted. An advisor should pressure-test the result before any buyer sees it, because the first version of every owner’s schedule contains both missed add-backs and indefensible ones.
Building your number requires handing someone the most sensitive documents you have — which is precisely why the first conversation must be structured for discretion. With us it is: the valuation read is free, private, and shared with no one; nothing you send creates an obligation or a listing; and if a sale process follows, buyers are qualified and sign NDAs before they learn your business’s name, with financial detail released in stages as they earn it. Your team, customers, and competitors hear nothing until you decide they should. Confidentiality is policy and process here, not a courtesy.
Earnings before interest, taxes, depreciation and amortization, adjusted for costs that will not continue under new ownership — the owner’s above-market compensation, family members on payroll, personal expenses run through the business, and true one-time costs. It is the standard measure of a business’s transferable earning power, and it is the number every industry multiple is applied to.
Seller’s discretionary earnings adds back the owner’s entire compensation, on the assumption the buyer will work in the business; adjusted EBITDA subtracts a market wage for the owner’s role, on the assumption the buyer must pay someone to do it. SDE is therefore always the larger figure and is used for smaller owner-operated businesses, while EBITDA is used by institutional buyers — and multiples quoted on one basis cannot be compared to multiples quoted on the other.
The recurring ones dressed as exceptions: repairs claimed as one-time when equipment breaks every year, marketing the business actually needs to hold revenue, wages for family members who do real work that someone must still do, “temporary” costs that appear in all three years of financials, and any adjustment without documentation. A defensible schedule concedes these before the buyer finds them.
By the multiple. A business priced at 5x adjusted EBITDA gains roughly five dollars of value for every defensible dollar of add-back — and loses five for every dollar that collapses in diligence. That leverage is why the add-back schedule deserves more care than almost any other document an owner prepares, and why building it early, with evidence, pays for itself many times over.