Walk into any coffee shop in London, Ontario where owners gather and you will hear the two acronyms tossed around like salt and pepper. SDE. EBITDA. Both claim to capture earnings. Both appear in listings and lender conversations. Yet they tell different stories, and mixing them up can cost a seller six figures or lead a buyer into a headache disguised as a bargain. At Liquid Sunset Business Brokers, we spend much of our day translating those stories into fair values that make sense in the market. This guide lays out how we think about SDE and EBITDA in real transactions across Southwestern Ontario, why lenders care, and how sellers can prepare without dressing the numbers in ways that backfire.
Two lenses on the same business
SDE stands for Seller’s Discretionary Earnings. It starts with net income, then adds back non-cash charges, one-time expenses, the owner’s salary and perks, and interest and taxes. SDE aims to answer a simple, owner-operator question: how much cash benefit does the current owner pull from the business in a normal year?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out capital structure and accounting choices to show core operating earnings. Unlike SDE, EBITDA does not add back a market-level salary for a working owner. EBITA and EBIT also show up, but for valuation buyers and lenders in London, EBITDA is the workhorse for companies with management teams or those attractive to financial buyers.
If your business is owner-run, local, and does not have a full leadership bench, the market speaks in SDE. If it has management, sticky contracts, or scale, the market leans toward EBITDA. Both can apply to the same company at different stages. We have taken construction firms from SDE to EBITDA multiples simply by hiring a general manager, splitting the owner out of dispatch, and documenting process. Earnings did not change much, but the buyer pool did.
Why this split exists
Buyers pay for future cash flow. The question is how transferable that cash flow is without a heroic owner. SDE embeds an assumption that the buyer will be the operator. EBITDA assumes a professionalized model, with the owner as investor. The more the business relies on one person, the more it belongs in SDE land. The more it runs on a team and systems, the more EBITDA feels right.
Banks like consistency and coverage. In London, the lender on a Main Street deal wants to see that the buyer can service debt from predictable cash flow after paying themselves a reasonable wage. That drives a practical blend: price on SDE, underwrite with an “EBITDA-like” lens that includes a normalized owner wage. We see this in transactions with Liquid Sunset Business Brokers, where SDE sets headline expectation and underwriting disciplines the final structure.
What actually gets added back
SDE and EBITDA often diverge in the add-backs. This is where deals live or die. Some examples from recent files at Liquid Sunset Business Brokers, adjusted for confidentiality:
- A cabinet shop showed $280,000 in SDE. The add-backs included $75,000 in the owner’s salary, $18,000 in depreciation, $6,000 for a one-time machine repair, and $12,000 of auto expenses tied to a personal SUV. Lenders accepted the salary and depreciation adds, pushed back on the SUV portion, and requested invoices for the repair. The final, accepted SDE settled at $268,000. A niche commercial cleaning firm presented $410,000 in SDE. The owner added back conference travel that doubled as a family vacation. We trimmed half of that. They also added a charity gala table each spring, which we removed since a large client sat at that table every year. After normalization and inserting a market wage for a general manager, EBITDA measured about $275,000, which matched buyer expectations for an absentee model.
Reasonable add-backs include owner compensation beyond a market wage, personal expenses run through the business, one-off legal or consulting fees tied to a discrete project, and non-cash charges. Gray areas include family vehicles used partly for business, above-market rent paid to a related landlord, and “one-time” repairs that recur every other year. If you are planning to sell in the next 12 to 24 months, clean up the gray areas now. It is easier to defend numbers through habits than explanations.
Multiples do not float in space
We often hear, “My friend sold for 4 times.” Four times what? SDE or EBITDA? Before or after a working owner wage? With or without inventory? These details change value by hundreds of thousands of dollars.
Across London and nearby markets, owner-operated service companies might trade around 2.5 to 3.5 times SDE, sometimes higher with sticky contracts or specialty licenses. Distribution or specialty manufacturing with management often trades 4 to 6 times EBITDA, with size driving the top end. Sub-million SDE businesses skew toward lower multiples; add recurring revenue and a capable second-in-command, and you can stretch higher.
This is not a rulebook. It is a range informed by cash flow durability, customer concentration, equipment condition, backlog, and the transferability of relationships. We have seen a 3 times SDE offer beat a higher nominal multiple once we accounted for net working capital demands and a clean transition plan. Focus on after-deal cash flow to the buyer, not the tallest multiple.
Lenders in London care about coverage
Debt service coverage ratio, the quiet partner in every deal, tells a lender whether the business can pay its loans and still breathe. Whether we work https://squareblogs.net/anderajrpz/h1-b-when-is-the-right-time-to-sell-a-business-in-london-ontario-insights with BDC, a chartered bank, or a credit union, the underwrite tends to converge on a few checks: EBITDA or SDE (after normalizing) must cover debt payments by a comfortable margin, often 1.25 times or greater. The underwriter will also add a market wage for the buyer, even if the buyer promises to live lean. If SDE is $300,000, and a fair owner-operator wage is $100,000, the effective EBITDA used for coverage may land around $200,000. On a five to seven year amortization, that frame limits how much debt the deal can carry.
When we represent a seller, we map likely lender math early and coach on price and structure that will clear underwriting. When we represent a buyer, we use the same math to pressure-test optimism. If the numbers only work with heroic add-backs and the thinnest wage, it will be a tough closing.
Where SDE misleads, and where EBITDA hides risk
SDE can flatter owner-heavy businesses by assuming the buyer can do everything the seller does. If an owner spends five hours daily on sales and another five on operations, SDE includes both outputs in one person’s wage. Most buyers cannot replicate that tempo. If we think the successor will need two hires, we adjust.
EBITDA can hide deferred costs. Imagine a shop with aging equipment and depreciation that does not match reality. EBITDA adds back depreciation, but the forklifts still cough every winter. A buyer who underestimates capital expenditure will feel that shortfall in year one. We push for a capex view that reflects the true maintenance cycle, especially in manufacturing and logistics.
In both measures, seasonality can play tricks. A landscaping business might look flush on a trailing twelve months that includes an unusually warm fall. We ask for three years of monthly data to see the pattern. Seeing winter cash dips early helps buyers arrange working capital lines and helps sellers explain the rhythm.
Bridging the owner-operator to investor gap
The path from SDE to EBITDA is less about accounting and more about building a team. A few moves that have paid off for our clients:
- Establish a true second-in-command who can run operations for two weeks without everything fraying. Document duties, authority, and metrics. Buyers will pay more for independence than for personality. Separate sales from the owner’s relationships. If the top five accounts only answer your texts, value will suffer. Introduce key staff. Share account plans. Invite buyers to ride-alongs so they see relationships living beyond the owner. Normalize payroll and perks. If a buyer must decode which phones, cars, and streaming services flow through the business, they apply a risk discount. Clean books read as lower risk. Right-size rent. If the company pays above-market rent to your holding company, expect buyers and lenders to reset it and shave value. Adjust to market ahead of listing, or be ready for that adjustment in diligence. Build a simple KPI dashboard. On one page, show weekly sales, gross margin, on-time delivery, rework rate, net promoter or repeat rate, and cash on hand. Consistent reporting builds trust and speeds diligence.
These changes do not just bump the multiple. They expand the buyer pool. A wider pool means better terms, including lower earnout dependence and fewer surprises.
A tale of two offers
A London auto service shop doing $2.4 million in revenue with $410,000 in SDE went to market after an 18-month cleanup. The owner had run personal expenses through the business for years, but we spent a full off-season pruning and documenting. We also promoted a lead tech to service manager with a bonus tied to labor margin. Two offers arrived.
Offer A priced at 3.4 times SDE, all cash at close, but required the seller to carry $200,000 in working capital beyond normal levels because parts inventory control was loose.
Offer B priced at 3.1 times SDE with a small 12-month earnout. The buyer brought an existing inventory system, accepted the current staff, and offered a shared services agreement for marketing. The bank preferred B due to stronger coverage. After adjusting for working capital, B put more certain cash in the seller’s pocket. The seller picked B, and the shop stabilized within three months because the service manager had already been operating like an owner.
Multiples matter, but deal shape and after-close execution matter more.
What buyers in London actually pay attention to
We walk many buyers through businesses across the city, from Oxford Street retail to industrial condos near Veterans Memorial Parkway. Patterns emerge. Buyers lean in when they see steady gross margin, customer concentration below 20 percent for any single account, and documented SOPs for the three or four critical workflows. They lean out when they see a two-month AR tail or a pipeline that depends on one rep.
A buyer searching for a small business for sale in London, Ontario often comes with corporate experience and savings, not deep sector expertise. They will pay for certainty. Sellers who can show a clear handover, templates, and training videos get better outcomes. Liquid Sunset Business Brokers has helped owners prepare simple playbooks that demystify the first 90 days. We have seen that alone add half a turn to the multiple.
Inventory and working capital, the silent price terms
A number on a teaser rarely clarifies whether inventory is included. In our world, “price includes inventory” needs a definition. Consumables, obsolete items, and slow-movers can inflate value on paper yet shrink it in practice. For a distribution business, we often agree on a peg based on a rolling 12-month average of usable inventory, then true-up at close. In service businesses, work in progress can complicate the handover. Defining how WIP is valued and who collects which receivables reduces last-minute friction.
Working capital targets deserve the same care. A deal that looks rich can become average if the seller must leave excess working capital in the business. The reverse is also true. As a rule, we track normalized net working capital across two or three clean years and negotiate from that base. Buyers and lenders in London respond well to this clarity.
The valuation math buyers run, simplified
Think like the person across the table. If the normalized EBITDA is $600,000 and the buyer expects to invest at a 20 to 25 percent unlevered yield, a fair enterprise value might range from $2.4 to $3 million. If they can prudently add debt at 7 to 9 percent and keep coverage healthy, they may stretch. On SDE deals, a buyer calculates SDE minus a market owner wage, then applies a multiple similar to EBITDA. That keeps lifestyle ambitions from distorting coverage. When a seller insists on a pure SDE multiple without acknowledging the wage, deals stall.
When the numbers say wait
Not every owner should sell this year. We sometimes advise clients to invest six to twelve months in cleanup. For a specialty contractor we met on Wonderland Road, the owner had an 800-pound client generating 65 percent of revenue. We paused the sale and helped build a referral program to land four mid-sized accounts. The mix shifted to 35 percent for the top client, SDE climbed from $360,000 to $410,000, and perceived risk fell. Offers arrived at 3.3 to 3.6 times SDE instead of the 2.4 to 2.7 range we anticipated earlier.
Patience is not always possible, especially for health or family reasons. When time is short, we adjust expectations and lean into structure. A lower cash price with an achievable earnout can still meet retirement needs if the business is fundamentally sound and the buyer is properly supported.
What to bring to the first conversation
Before you call a business broker in London, Ontario, gather a few essentials. Three years of financial statements that match filed taxes, a current year-to-date P&L, and an AR/AP aging report. If you have any major contracts or leases, pull those too. Make a simple list of owner add-backs with explanations and supporting records. We spend less time debating when the paper trail is clear, and lenders sense the same confidence.
Liquid Sunset Business Brokers will ask about your role week by week, your top customers, staff tenure, and any one-off events that distorted a year. If any skeletons exist, put them on the table early. Surprises kill trust; disclosed issues get priced and managed. We have closed plenty of deals with imperfect stories because the narrative was honest and the plan made sense.
A quick field guide to SDE vs. EBITDA
Here is a compact comparison that we use with clients deciding how to frame their numbers.
- SDE is best for owner-operated businesses where the buyer expects to work full-time. It adds back the owner’s comp and personal expenses. Multiples are typically lower than EBITDA, but the base is larger. EBITDA is best for businesses with management and systems. It excludes owner comp. Multiples tend to be higher, but the base is smaller than SDE for the same company. Lenders often convert SDE to an EBITDA-like figure by inserting a market owner wage for coverage. If you price purely on SDE but ignore this, financing can fall short. Add-backs must be real, documented, and non-recurring. If an expense shows up every year in a different shirt, it is not one-time. The choice is strategic. You can migrate over time by formalizing roles, upgrading reporting, and reducing owner reliance.
How Liquid Sunset approaches valuation
At Liquid Sunset Business Brokers, we start with a valuation range anchored by three views: SDE, EBITDA, and after-deal cash flow. We benchmark against closed transactions in Ontario when available, lean on industry data, and then adjust for local realities. A snow removal business with contracts across North London faces different risk and seasonality than a similar P&L in Vancouver. We also run sensitivity tests. What happens if labor costs rise 3 percent? If a top customer churns? Offers that survive sensitivity tend to close.
Sellers sometimes ask for the highest number the market might pay. We share it, then grade the probability of closing at that number and outline what must be true. If those truths require two hires, tighter inventory control, and six months, we say so. The brand we have earned as business brokers in London, Ontario rests on deals that work for both sides, not on splashy listings that linger.
For buyers, our counsel is equally blunt. If you are buying a business in London because you want freedom, do not ignore the grind that freedom requires. If you are moving from corporate to ownership, assume your first year looks like two jobs. Value a seller who has built clean operations and a team you can keep. Pay fair money for a stable base rather than a discount for chaos.
Common traps that derail pricing
We see three recurring issues.
First, confusing revenue growth with value. Growth at 5 percent margin is not worth much. A flat top line with rising margin can be worth more. Buyers pay for gross profit and cash conversion.
Second, underestimating the cost of replacing the owner. If you manage sales, operations, and finance, and your buyer cannot, the deal needs to fund at least one salary. Build that into the model before you shop for a price.
Third, weak documentation. When expenses cannot be traced or customer contracts are handshake only, diligence slows. Every extra week increases the chance of fatigue and churn. Tight numbers move quickly.
Where to start if you are thinking of selling or buying
If you own a business and want a quiet read on value, gather your numbers and ask for an SDE and EBITDA view. We will flag where your story is strong and where it needs work. If you are a buyer scanning the market for a small business for sale in London, Ontario, build your credit file early, have your equity ready, and learn the rhythm of a few industries before you choose one.
Liquid Sunset Business Brokers knows this city’s lanes. We have helped owners sell HVAC firms on the east side, cafés downtown, specialty logistics outfits near the 401, and software-leaning service companies that sell nationwide from a London base. The playbook changes with each, but the disciplines remain: honest numbers, clean add-backs, a fair wage in the model, and a structure that keeps both parties focused on a strong first year.
SDE and EBITDA are not rivals. They are tools. Used well, they bring clarity and confidence to a life-changing decision. Used loosely, they create gaps between price and reality that no amount of charm can bridge. If you want a grounded conversation about valuation, reach out to Liquid Sunset Business Brokers. Whether you are buying a business in London or preparing to sell one you have built over decades, we will help you pick the right lens, tell the true story, and meet the market where it is.