Instructor key — Module 2: Deconstructing Valuation Multiples: SDE vs. EBITDA Multiples by Industry & Size Tier
Instructor/solutions version. Keep separate from the student assignment during assessment.
Calculation solution
A seller asks 3.2x SDE of $450,000. Replacement labor is $170,000. Calculate equivalent EBITDA multiple.
Calculated result: 5.14285714 (actual USD, except where the question requests a ratio or return). Price $1.44m divided by managed EBITDA $280,000, not by SDE again. Use appropriate display rounding while retaining formula precision. This result is generated from the independent assignment inputs, not copied from the chapter answer.
Conceptual and judgment marking
A complete conceptual response identifies the measure's economic purpose, the defined perimeter and the risk of confusing it with another metric. Award up to 20 points for explanation, not terminology alone. For the applied question, award up to 15 for linking evidence to a concrete acquisition consequence; do not require an optimistic recommendation.
Spreadsheet marking
Award 15 of the 30 spreadsheet points for live links from assumptions, 10 for a coherent 10% mutation and predicted direction, and 5 for units, readable formatting and checks. Inspect formulas directly rather than accepting cached numbers. Use the instructor workbook for the controlling capstone model; this independent lab uses different inputs.
Calculation marking: 10 points for the correct equation/perimeter, 15 for intermediate arithmetic, and 10 for result, units and rounding. Overall pass requires 80 and all critical checks in the student version.
Original chapter practice solutions
The following solutions were moved out of the chapter so full answers no longer sit immediately below student questions. Match them in order to the chapter's practice problems.
Worked solution: Price is $1.8 million. Managed EBITDA is $375,000. The equivalent multiple is $1.8 million / $375,000 = 4.8x. The advertised 3.0x ratio includes compensation for the working owner's role in its denominator. It does not establish a lower price relative to managed earnings.
Worked solution: EBITDA is $710,000 + $240,000 − $180,000 + $20,000 + $30,000 − $20,000 = $800,000. SDE is $980,000 under the disclosed convention. The ask is 5.25x EBITDA and approximately 4.2857x SDE. Neither figure is a measure of cash available after acquisition debt service.
Worked solution: Each price is $2.7 million. EBITDA is $450,000 and $270,000 respectively. The multiples are 6.0x and 10.0x. A common revenue multiple therefore pays much more per dollar of earnings for the lower-margin company unless justified future improvements exist.
Worked solution: Base EV is $3.8 million. Revised EBITDA is $760,000, producing $3.42 million EV at 4.5x. Total reduction is $380,000. At the original multiple, the earnings correction alone would reduce value $190,000; the subsequent multiple change on revised earnings reduces another $190,000. Keep the sequence explicit to avoid inconsistent attribution.
Worked solution: A retains $430,000, a 21.5% pre-tax yield on price. B retains $270,000, a 13.5% yield. Both trade at 4x EBITDA, but their cash economics differ materially. A valuation conclusion should incorporate the difference rather than assume the shared multiple makes them equivalent investments.