How to Value a Small Business in Canada: SDE, EBITDA & Multiples Explained

In Canadian small business M&A, the seller sets the asking price — and that price is almost always derived from their own sense of what the business is worth, shaped by conversations with their broker and their accountant. Sellers routinely overprice their businesses by 20–40% on the first listing, particularly in industries with active deal flow where optimistic comparables are easy to find. As a buyer, your ability to counter credibly depends entirely on your own valuation analysis.

A credible valuation also matters for financing. BDC and chartered bank lenders will conduct their own business valuation before approving an acquisition loan, and they will lend against their appraised value, not the seller's asking price. If you have agreed to pay $1.2M for a business that the bank values at $900K, you are on the hook for a $300K gap that your lender will not fill.

Finally, valuation sets the foundation for deal structure negotiations. If the seller wants $1.2M but you can only justify $1.0M based on normalized earnings, an earn-out, a vendor take-back, or an extended transition period might bridge the gap in a way that satisfies both parties without one side paying full premium up front.

SDE is the primary valuation metric for owner-operated businesses under approximately $5M in annual revenue. It represents the total economic benefit available to a single full-time owner-operator — meaning it adds back to net income all the expenses that were incurred for the owner's benefit or that a new owner would not face.

The SDE formula is: Net Profit + Owner Salary + Owner Benefits and Perks + Depreciation and Amortization + Interest + One-Time or Non-Recurring Expenses − One-Time or Non-Recurring Income = SDE.

Here is a worked example. Assume a restaurant in East Vancouver with annual revenue of $800,000. Net profit as reported: $45,000. The owner pays himself a salary of $90,000 (add back). The owner has a personal cell phone on the business: $2,400/year (add back). Depreciation on kitchen equipment: $18,000 (add back). Interest on a business loan being paid off at close: $6,000 (add back). A one-time fire suppression system repair: $12,000 (add back). SDE = $45,000 + $90,000 + $2,400 + $18,000 + $6,000 + $12,000 = $173,400. At a 2.5× SDE multiple, that restaurant is worth approximately $433,500.

EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — is the standard valuation metric for businesses large enough to require a management team to run. Unlike SDE, EBITDA does not add back owner compensation because the assumption is that the new owner will hire a professional manager at market rate rather than replacing the departing owner's labour directly.

EBITDA is typically used for businesses generating over $1M in EBITDA (often corresponding to $5–10M+ in revenue) or for businesses that are already management-run rather than owner-operated. Private equity acquirers, strategic buyers, and most lenders above $5M transaction size will exclusively use EBITDA as their earnings baseline.

The practical difference between SDE and EBITDA is significant for buyers. A restaurant generating $173,400 in SDE might generate only $83,400 in EBITDA (once we exclude the owner salary add-back of $90,000), making the SDE multiple the far more buyer-relevant metric for that class of business. Sellers and their brokers occasionally attempt to use EBITDA multiples on SDE-class businesses to inflate apparent valuations — a tactic you need to recognise and reject.

Multiples in BC vary significantly by industry. These are observed transaction ranges from deals closed in the BC market and should be treated as starting-point benchmarks, not fixed rules — individual deals trade at premiums or discounts based on growth trajectory, customer concentration, lease quality, and owner-dependency.

Restaurants and food service businesses (owner-operated): 1.5–3.0× SDE. The wide range reflects the difference between a struggling independent that barely covers SDE and a well-systematised franchise or concept with strong brand recognition and stable revenues. Cafes and coffee shops typically trade at the lower end, 1.5–2.5× SDE.

HVAC and trades companies: 2.5–4.5× SDE (or 3.5–5.0× EBITDA for management-run businesses). Recurring service contracts and commercial maintenance agreements command premium multiples. Residential-only HVAC trades at the lower end.

Dental practices: 3.0–5.5× EBITDA. BC dental multiples have compressed slightly from the 2021–2022 peak driven by DSO consolidation but remain elevated relative to historical norms. Associate-dependent practices trade at discounts.

Technology / SaaS businesses: 4.0–8.0× SDE or ARR multiples depending on growth rate. These are highly variable and require specialist analysis.

Retail stores: 1.5–2.5× SDE. Retail multiples are suppressed by e-commerce competition and lease exposure. Convenience and gas station combinations often trade based on volume metrics rather than SDE multiples.

Add-backs are the most contested element of any small business valuation in Canada, and they are the most frequent source of post-LOI negotiation disputes. A legitimate add-back is an expense that (a) was genuinely incurred, (b) benefited the owner personally or was one-time in nature, and (c) will not recur under new ownership.

Legitimate add-backs include owner salary and benefits, personal vehicle expenses run through the business, personal travel classified as business travel, one-time legal disputes that are now resolved, and non-recurring repairs or capital expenditures that have already been completed.

Problematic or contested add-backs include normalised marketing expenses the seller stopped running six months before listing the business to inflate near-term profitability, officers' compensation for family members who perform real work that a new owner would need to replace, lease adjustments where the seller owns the building and charges below-market rent (the add-back overstates earnings), and 'discretionary' owner expenses where the line between personal and business is unclear.

You should request three to five years of financial statements and look for add-back patterns. An owner who suddenly started adding back $60,000 in 'discretionary expenses' in the most recent year is a red flag. Recast the last three years independently and compare. Ask the accountant or broker to justify each add-back in writing and tie it to a specific line on the financial statements.

Earnings-based valuation (SDE or EBITDA multiples) governs for most operating businesses with meaningful cash flow. But asset-based valuation becomes relevant — or even dominant — in three situations: when the business has minimal profitability but significant tangible assets (equipment, inventory, real estate); when the business is being acquired for its assets rather than its operations (a winding-down business where you want the equipment and customer list); and when the earnings value calculated by multiples is actually lower than the liquidation value of the assets.

For buyers, recognising when you are paying goodwill on top of asset value is essential. In a restaurant acquisition, you might pay $300,000 for a business with $200,000 in equipment and leasehold value and $100,000 in attributed goodwill. That goodwill is justified only if the business's cash flows will generate a return on the premium above asset value. A business with declining revenues and heavy asset reliance may be worth more dead than alive — a situation that should prompt either a significantly lower offer or a walk-away.

The most common and costly mistake is accepting the seller's recast financials at face value without independent verification. Sellers, with the help of their accountants, naturally present the most optimistic version of their earnings. Normalised EBITDA or SDE figures should always be reconciled back to the CRA T2 corporate return, GST/HST filings, and bank statements. Significant discrepancies between reported and tax-filed financials are a serious red flag.

The second major mistake is applying generic multiple benchmarks without adjusting for deal-specific risk factors. A restaurant with one large corporate catering client representing 40% of revenues should trade at a meaningful discount to the industry average — the customer concentration risk alone justifies a lower multiple.

Third, buyers frequently ignore working capital in valuation. When you buy a business, you need not only the purchase price but also sufficient working capital to operate the business through its seasonal fluctuations and the transition period. If the seller is stripping working capital (running receivables high and payables current before close), the effective purchase price is higher than the stated number.

Fourth, buyers discount or ignore the cost of deferred maintenance and capex. A restaurant with aging kitchen equipment may show healthy SDE today but face $80,000–$150,000 in equipment replacement within two years. That future capital requirement should reduce your offer price or be addressed in deal structure.