SDE vs. EBITDA vs. ARR: Which Fits Your SaaS Valuation?
Understand SDE, EBITDA, and ARR with one SaaS example. Learn how owner replacement costs and revenue definitions change the multiple buyers quote.
Buyers pay for future earnings. A multiple is a shortcut for estimating their value.
SDE and EBITDA start with current earnings. ARR uses recurring revenue to estimate what the business could earn later. Each helps a buyer answer the same question: how much cash can this business produce, and how likely is it to deliver?
An ARR multiple puts the emphasis on future profit. The buyer still needs a reason to believe it will arrive.
What each metric tells a buyer
| Metric | What it measures | What the buyer needs to know |
|---|---|---|
| SDE | Earnings available to one owner-operator, after supported adjustments | What work must the buyer take over? |
| EBITDA or adjusted EBITDA | Earnings before specified expenses, with any further adjustments shown separately | What does the business earn with the required team in place? |
| ARR | Annualized recurring revenue under a stated definition and measurement date | How durable is that revenue, and what will it cost to retain and grow it? |
Size alone does not settle the choice. Two companies can have the same ARR, but one depends on a founder who handles sales, support, and development. The other has a team that can run without the owner.
SDE: account for the owner’s work
Seller’s discretionary earnings starts with net income. It adds back interest, income taxes, depreciation, amortization, one working owner’s compensation, and supported discretionary or one-time expenses. Document each adjustment. BizBuySell’s add-back guide explains which adjustments buyers may accept, including how to treat multiple working owners.
Adding back your salary does not remove your job.
If you work 30 hours a week, show where those hours go. A buyer who takes over your job can keep the compensation. A buyer who hires someone needs to budget for it. Ongoing development, support, and hosting still cost money.
Use the SDE valuation calculator for an initial estimate. Keep your list of add-backs with the result.
EBITDA: separate the definition from the adjustments
EBITDA adds interest, income taxes, depreciation, and amortization back to net income. Show any further adjustments separately as adjusted EBITDA. The SEC’s non-GAAP guidance makes this distinction for public-company reporting; it is also a useful discipline when preparing private-company numbers.
For a founder-led business, ask what the company earns after paying someone to do the necessary work.
If you pay yourself more than it would cost to replace you, the difference may be an add-back. If you underpay yourself, budgeting for a replacement can reduce earnings. Document the job and what it would cost to fill it.
ARR: a proxy for future earnings
A growing SaaS business may spend heavily on sales, product, and hiring. Those investments can leave little profit today while building a larger source of future earnings.
That helps explain why buyers use ARR to compare growing SaaS businesses, especially larger ones. Two companies with similar revenue may report different profits because one invests more in growth. ARR gives buyers a common starting point.
Growth and retention make the case. Keep customers, expand their spending, and add new ones, and recurring revenue can compound. If costs grow more slowly than revenue, profit can grow with it.
The buyer needs to believe that will happen. More revenue alone does not guarantee more profit.
If growth stalls or customers keep leaving, an ARR multiple becomes harder to justify. A slow-growing SaaS business can still be highly profitable. Buyers then have more reason to value the earnings already there.
Define the revenue before applying the multiple
For this article, ARR means current monthly recurring revenue multiplied by 12. Subscription reporting conventions differ, including whether companies count only annual contracts. State your definition and measurement date. ChartMogul’s ARR guide explains these distinctions.
Spread annual subscription payments across the months they cover. Keep one-time implementation and services revenue separate. A large annual cash receipt is not a sudden increase in monthly recurring revenue.
ARR describes the current recurring run rate. Revenue in the accounts covers a past period. Neither tells you how much profit the business earns.
Use the SaaS ARR valuation calculator to explore how retention, margins, and other risks affect the estimate. Compare it with an earnings-based valuation.
One company, three different multiples
Consider a hypothetical SaaS company. Its trailing 12-month accounts include the owner’s compensation and the one-time expense below. Current subscription MRR is $100,000, so ARR under our definition is $1.2 million. That run rate need not equal trailing recognized revenue.
| Earnings bridge | Amount |
|---|---|
| Net income | $200,000 |
| Add interest | $10,000 |
| Add income taxes | $40,000 |
| Add depreciation and amortization | $20,000 |
| EBITDA | $270,000 |
| Add one working owner’s compensation | $150,000 |
| Add a documented, accepted one-time expense | $20,000 |
| SDE | $440,000 |
| Subtract assumed fully loaded owner replacement cost | $120,000 |
| Adjusted EBITDA after replacement | $320,000 |
The $120,000 replacement cost is an assumption. A buyer would need to check whether it covers all the owner’s work.
At an assumed enterprise value of $1.6 million, the same price is:
- 3.64x SDE: $1.6 million divided by $440,000.
- 5.00x adjusted EBITDA: $1.6 million divided by $320,000.
- 1.33x ARR: $1.6 million divided by $1.2 million.
These multiples illustrate the math; they are not market benchmarks. Calling this a “5x deal” tells you little until you know what the five applies to.
Check what the price includes
The headline price can mean enterprise value, equity value, upfront consideration, or a maximum payment that includes an earnout. Those amounts are not interchangeable.
The disclosed software acquisition comps separate these price and metric definitions. Before using a deal as a comparison, check its source, financial period, and payment terms.
Public trading indexes require care, too. The SaaS Capital Index uses market capitalization divided by annualized quarterly GAAP revenue, without adjusting market capitalization for cash or debt. It is a public-market reference, not an EV/ARR acquisition multiple. It should not be treated as a direct price quote for a private business.
What to prepare before discussing a price
Show how you get from your accounts to the earnings figure. Include your responsibilities, each proposed add-back, and the cost of replacing you. For ARR, record the measurement date and changes from new customers, expansion, contraction, and churn.
Then ask the buyer which metric they use and why. Bring the conversation back to what matters: the earnings they expect and the assumptions behind them.
If you are moving from valuation to a sale, read how to sell your SaaS business. For a discussion of your numbers, buyer fit, and timing, share your business details.