ValuationUpdated January 2026·7 min read

SDE vs EBITDA for small SaaS

When to use SDE and when to use EBITDA for a SaaS business valuation — with worked examples and the $1M ARR threshold.

Primary keyword

SDE vs EBITDA SaaS

Search intent

Seller or buyer confused about which earnings metric applies.

TL;DR

Under $1M ARR: SDE is the standard.
Over $2M ARR: EBITDA is the standard.
Between: use both and let the buyer pick — it usually favors you.

How SDE is calculated

TTM net income + owner's salary + non-cash expenses + one-time expenses + interest. It answers: 'how much cash does this generate for one full-time owner-operator?'

How EBITDA is calculated

Net income + interest + taxes + depreciation + amortization. It assumes professional management already exists (or is priced in). More appropriate for businesses that aren't founder-run.

The first 90 days: preserve, audit, then improve

On SDE vs EBITDA SaaS, the first 30 days after close should be about not breaking anything. Run the seller's cadence, ship no new features, change no vendors, send no ‘new owner' email the seller didn't co-sign. You paid for a working machine — don't take it apart on day two.

Days 31–60 are the audit: read 12 months of support tickets, sit on a sales call, watch a churn call, look at the actual bank-statement expense pattern. Days 61–90 are your first small change — one process improvement the previous owner had been meaning to make. That rhythm becomes your operating model.

Deal structures that survive the first bad month

The 2026 median on SDE vs EBITDA SaaS is 80% cash at close, 10–15% seller note over 18–24 months at prime + 2.5%, and 5–10% in escrow for 3–6 months. Straight cash usually costs the buyer a 5–10% premium — worth it for speed on small deals but painful in a competitive process.

Earn-outs align incentives on paper and poison transitions in practice. Only use them tied to metrics the buyer cannot easily manipulate (existing-customer renewal, gross bookings, delivered volume). Keep any earn-out under 20% of price and under 18 months, or plan on litigation.

Diligence checklist that separates real buyers from tire-kickers

A serious buyer looking at SDE vs EBITDA SaaS works off a written question tracker in six buckets — financial, commercial, technical, legal, team, and platform. If any bucket has two red flags, the deal usually re-trades or dies. Great sellers preempt this by publishing the answers before diligence starts.

Reconcile 24 months of P&L to bank statements line by line. Export Stripe/Paddle at raw-event level, not the dashboard summary. Have every contractor's IP assignment in a single PDF. Sit for a 60-minute recorded ‘objection interview' with a friendly buyer before you publish — it's the cheapest diligence rehearsal you'll ever run.

FAQs

Can I use both in one listing?

Yes, and I recommend it in the $1M–$2M ARR band. Present both and let buyer's advisor argue.

What's the single biggest post-close risk?

Losing a top-3 customer or channel in the first 60 days. Mitigate with a joint intro email and a 30–90 day paid transition.

How much cash should a buyer have available?

For sub-$1M SDE vs EBITDA SaaS deals, plan 70–85% of EV in cash plus a 10% working-capital buffer for the first 90 days.

What's a realistic timeline for SDE vs EBITDA SaaS in 2026?

Two to three weeks of prep, two to four under LOI, one to two to close. Past 100 days signals the price or structure is wrong.

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