How-ToApril 2025 · 6 min read

How to Calculate EBITDA for Your Home Service Business

Q: Should I present SDE or EBITDA to potential buyers?

Present both, clearly labeled with documentation. For businesses under $2M EBITDA with owner-operators, lead with SDE (it's higher and more accurately reflects earnings power). For businesses with professional management teams and $2M+ EBITDA, PE buyers will insist on EBITDA analysis. Your broker will help you frame each method appropriately for different buyer types.

EBITDA is the primary valuation metric for larger home service businesses. Here's exactly how to calculate it correctly and what to add back.

Jason Taken

HedgeStone Business Advisors

While SDE is the primary valuation metric for home service businesses under ~$5M revenue, EBITDA becomes increasingly important as businesses grow. PE buyers almost always use EBITDA multiples. Here's how to calculate EBITDA for your home service business — and what the differences from SDE mean for your valuation.

The EBITDA Formula

EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. Start with net income, then add back: (1) Interest expense — this is a financing decision that a new owner may change; (2) Income taxes — not an operational expense; (3) Depreciation — non-cash accounting expense; (4) Amortization — non-cash accounting expense. Unlike SDE, EBITDA does NOT add back owner compensation, because the assumption is that a management team is already in place (or would be hired at market rate).

EBITDA vs. SDE: The Key Difference

For a home service business with a $150K owner salary: SDE = EBITDA + $150K owner salary (plus other owner add-backs). EBITDA assumes the owner is replaced at market cost. If a $150K manager is required to replace you, and you're paying yourself $150K, then SDE ≈ EBITDA. But if you're paying yourself $300K when a market-rate manager would cost $150K, SDE is $150K higher than EBITDA. This difference drives significant valuation differences between the two methods.

Normalized EBITDA: Adjustments Buyers Make

PE buyers normalize EBITDA for non-recurring items and owner adjustments: remove one-time revenue or expenses that won't repeat, adjust owner salary to market-rate replacement cost (even if owner is staying temporarily), add back non-cash expenses correctly, and ensure rent is at market rate (particularly if you own the building and may be charging above or below market). The result is 'adjusted EBITDA' — the number that PE multiples are applied to.

When EBITDA Matters More Than SDE

EBITDA becomes the primary metric when: the business has $1M+ EBITDA, there's a management team in place (business runs without the owner), PE buyers are the likely acquirers, or the business is being valued as an institutional investment rather than a job replacement. For smaller home service businesses, SDE almost always produces a higher number than EBITDA — and is the more appropriate valuation basis.

Frequently Asked Questions

Should I present SDE or EBITDA to potential buyers?

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