Valuation methods start from two definitions of profit, and that is where they diverge

Owner-operator earnings

SDE is the relevant measure when the buyer expects to work full time in the business.

It describes the financial benefit available to one owner-operator, rather than the earnings remaining after hiring someone else to perform the owner's work. The distinction affects the starting point before any valuation multiple is applied.

SDE starts with operating profit and adds the owner's compensation and benefits, together with genuinely discretionary or non-recurring spending. Its result represents the total financial benefit of owning and working in the business. It does not represent earnings after paying an outside manager to take on that work.

Earnings after hiring management

EBITDA is the appropriate starting measure when the buyer will not perform the owner's work personally. It means earnings before interest, taxes, depreciation and amortization, after allowing for a market-rate management wage. The owner's labour stays as a cost because the buyer is assessing the business as an operating asset.

The buyer's plan, rather than the seller's preferred earnings label, should guide the choice. Test what the purchaser intends to do during a buyer search. A person buying a job as well as a return may service acquisition debt from business earnings, while a competitor acquisition or investor-led purchase may require paid management.

The difference between SDE and EBITDA is approximately the value of the owner's work, not a rounding issue. If EBITDA is E after deducting market-rate owner compensation W, then SDE is E + W. A buyer installing a manager should account for that person's cost rather than treating the seller's SDE as earnings available without change.

For an owner who works part time, or two owners sharing one job, use the market-rate cost of the management work that must be replaced. Support that cost with evidence of what hiring someone would actually cost. Labour-market evidence is more defensible than selecting a wage to produce a preferred valuation.

Adjustments that can be supported

Include an adjustment in continuing earnings only when records support it and the business can genuinely avoid the cost. A schedule should name the earnings measure being used and identify each proposed item. Unsupported add-backs can be challenged in diligence, shifting the disagreement to a later and costlier stage.

Each item should be documented, genuinely non-recurring rather than unpredictable but repeated, and connected to spending the business can avoid. Ask whether operations can continue without the expense. Marketing, an unfilled role or deferred maintenance may look optional, but a successor may need to fund them immediately; a diligence review can reject unsupported adjustments.

Earnings-based value

An earnings-based method claims that the business is worth the present value of its future earnings. Capitalization applies a capitalization rate to normalized earnings, while discounted cash flow discounts projected cash flows. These methods fit profitable trading businesses with a track record, but past performance may not predict the future.

Erratic or loss-making earnings weaken this approach, as does a history that no longer represents likely operations. Formal business valuation uses standard approaches, and earnings-based work can be tested against other evidence. A method's familiarity, or its ability to produce a preferred figure, does not establish that its assumptions fit.

Value from assets

An asset-based method estimates what business assets could be sold for, less what the business owes. Adjusted net asset value and liquidation value are examples.

This approach can suit asset-heavy operations and property holdings, or a business whose assets are worth more when sold separately than kept in a going concern.

For a service business, customers and staff may account for more of its value than equipment, making an asset calculation a poor stand-alone answer. Asset value can nevertheless provide a floor when winding down and selling assets is a realistic alternative. If earnings-based value falls below liquidation value net of liabilities, consider whether continued trading makes sense.

Evidence from comparable sales

Market comparison uses multiples from comparable transactions, applied to SDE or EBITDA. It is most useful where completed sales involve the same kind of business, a similar scale and a recent period. A headline price alone is not enough, because transaction terms can change what the stated amount means.

A sale involving an earn-out differs from the same amount paid in cash. Brokers and professional appraisers generally hold transaction databases, while public business listings show asking prices rather than necessarily achieved prices. A long-listed business at a high asking price demonstrates optimism, not what a buyer has paid.

Comparable evidence can test an earnings-based result: if a defensible calculation produces a figure no comparable business has achieved, revisit its assumptions. Brokers may help identify transaction evidence, but visible asking prices should not be mistaken for completed sales. The method's strength depends on the quality and similarity of the transactions available.

Confidence behind the earnings

Similar reported earnings do not establish equal value. Buyers also assess how likely those earnings are to continue, and accounts may not show the underlying uncertainty. Customer concentration, owner dependence, transferability, the direction of earnings and record quality can each affect confidence in the business being acquired.

Work in the year before a sale can address these concerns more reliably than arguing over a method. Better records, documented processes or action on concentration and transferability may affect confidence in continuing earnings. Changing the calculation alone does not make business risks disappear.

Purpose and reliance

Define the job of a valuation opinion before commissioning it. Lending, a partnership dispute, tax or estate work, and negotiation may involve different bases of value.

Identify the governing requirement and the responsible authority, particularly when a lender, court or regulator, rather than the owner alone, will rely on the result.

Applicable appraisal standards and other requirements may differ. In the United States, appraisers on assignments subject to the Uniform Standards of Professional Appraisal Practice must follow applicable requirements. A court or regulator may set the basis, and a tax valuation is not automatically interchangeable with a negotiation estimate.

For use beyond personal orientation before a sale, engage a qualified appraiser familiar with the applicable requirements. For orientation only, treat the result as a starting position, not a fact about the business. The intended user and governing rules should be clear before work begins, especially when another party will rely on the opinion.

When methods disagree

A wide gap between methods is information about the business, not automatically an error. Identify the assumption or risk that the method producing the difference fails to capture. That may reveal what a buyer will focus on and which parts of the business evidence need closer examination.

For negotiation, build a range rather than treating one formula-derived result as a fact. Calculate earnings under both definitions, identify the measure the likely buyer will use, and account for business risks. Keep adjustment records and be ready to explain each assumption with evidence rather than defending an untested figure.

Use the range as a reference point, not as your negotiating position, and include its low end so you know beforehand whether you would accept it. Price is settled through negotiation over earnings both sides accept and risks neither can eliminate through argument. The range makes those assumptions visible without pretending it determines the result.

A calculator can provide a starting point, but calculator services cannot determine which earnings definition or business risks apply to a particular situation. Choosing the method that returns the highest number is unlikely to withstand scrutiny and may weaken confidence in the rest of the file when its assumptions have not been tested.