HVAC Business Valuation Multiples 2025: What Buyers Are Paying
HVAC companies are commanding 2.5x–5.0x SDE in today's market. Here's exactly what's driving those multiples up — and what's dragging them down.
Read Article →How-ToMarch 2025 · 7 min read
What Is Seller Discretionary Earnings (SDE) and Why It Matters
SDE is the single most important number in a home service business sale. Most owners get it wrong. Here's how to calculate it correctly.
JT
Jason Taken
HedgeStone Business Advisors
Seller Discretionary Earnings (SDE) is the foundation of virtually every home service business valuation under $5M in revenue. If you don't understand SDE, you don't understand what your business is worth — and neither will the buyer who low-balls you.
The SDE Formula
SDE = Net Income + Interest Expense + Income Taxes + Depreciation + Amortization + Owner Add-Backs. The first five items are standard EBITDA adjustments — you're backing out financing and accounting decisions that a new owner will make differently. The add-backs are where most sellers either leave money on the table or create problems with buyers.
Owner Add-Backs: The Most Important (and Misunderstood) Part
Add-backs are expenses in your business that personally benefit you as the owner and won't transfer to a new owner. Common legitimate add-backs: your salary (above what a replacement manager would cost), health insurance premiums, retirement plan contributions, personal vehicle expenses, cell phone, and any non-recurring expenses like one-time legal fees or equipment replacement. Common add-back mistakes: adding back items that a new owner would genuinely need to spend, claiming personal expenses that weren't actually run through the business, and using 'adjusted' numbers that don't tie to your tax returns.
Why SDE vs. EBITDA Matters
EBITDA doesn't include owner add-backs — it's designed for businesses where the owner is already replaced by a management team. For owner-operated home service businesses, EBITDA understates the real earnings because it doesn't capture what the working owner extracts from the business. A $1M revenue HVAC company with a $200K owner salary, $30K owner health insurance, and $20K owner vehicle has an SDE of $280K but an EBITDA of perhaps $30K. Very different business valuations.
Normalizing SDE for Multiple Years
Buyers will ask for 2–3 years of financial data and calculate a weighted average SDE. Typically: year 3 gets 1x weight, year 2 gets 2x weight, and the most recent year gets 3x weight. This protects buyers from buying a business that had one great year. It also means a strong recent year matters more than an average prior year. Some buyers use only the most recent trailing 12 months.
Common SDE Calculation Errors
The most costly mistakes: not adding back depreciation (the most commonly missed item), adding back a salary but forgetting health insurance and retirement, including one-time revenue in SDE without disclosing it, and using revenue from a partial year as if it's full-year. Work with a CPA who has M&A experience to prepare your SDE recast before going to market.
Frequently Asked Questions
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