When a buyer, broker or lender talks about your earnings, they will almost always use one of two terms: SDE or EBITDA. Understanding SDE vs. EBITDA matters because they measure different things, attract different buyers and are paired with different multiples. Use the wrong one and your business can look worth noticeably more, or less, than it really is.
Here is what each term means, how to calculate it, which one applies to your business and how to move from one to the other.
What is SDE (seller’s discretionary earnings)?
Seller’s discretionary earnings (SDE) is the total financial benefit a business provides to one full-time owner-operator. It starts with pre-tax net profit and adds back:
- The owner’s salary, payroll taxes and benefits (for one owner)
- Interest expense
- Depreciation and amortization
- Personal expenses run through the business
- One-time or non-recurring costs
SDE answers a simple question for an individual buyer: if I buy this business and run it myself, how much will it put in my pocket before debt payments and income taxes?
What is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation and amortization. Like SDE, it adds back interest, depreciation, amortization and one-time items. The key difference is the owner. EBITDA assumes the business pays a market-rate salary to whoever runs it, so the owner’s compensation is not added back in full. Once those adjustments are made, buyers call it adjusted EBITDA.
EBITDA answers a different question, the one investors and larger acquirers ask: what does this business earn as a company, with management already paid for?
SDE vs. EBITDA: the key differences
- Owner pay: SDE adds back one owner’s full compensation. EBITDA deducts a market salary for management.
- Typical buyer: SDE suits individual buyers who will run the business themselves. EBITDA suits strategic buyers, private equity and investor groups.
- Business size: SDE is usually used for smaller, owner-operated companies. EBITDA is usually used for larger companies with a management team.
- Multiple: EBITDA-based businesses generally sell for higher multiples because they carry less owner risk.
How to calculate SDE and EBITDA: an example
Say your business shows $300,000 in pre-tax net profit after paying you a $150,000 salary. It also has $30,000 in depreciation, $20,000 in interest and $10,000 in personal expenses run through the books.
- SDE: $300,000 + $150,000 owner salary + $30,000 depreciation + $20,000 interest + $10,000 personal expenses = $510,000
- Adjusted EBITDA: if a general manager could run the business for $120,000, start from SDE and subtract that market salary: $510,000 − $120,000 = $390,000
Same business, two different earnings figures. Neither is wrong; they are built for different buyers.
Which one applies to your business?
The line isn’t fixed, but in general:
- SDE applies when the business is smaller and the owner works in it full time, so the buyer will likely step into the owner’s role.
- EBITDA applies when the business is larger and has managers running daily operations, so the buyer is buying a company rather than a job.
As a business grows and the owner steps back, it moves from SDE territory into EBITDA territory, and it is usually valued at a higher multiple.
Why mixing them up costs sellers money
The multiple a buyer applies only makes sense with the right earnings measure. Applying an EBITDA-style multiple to SDE overstates value and leads to a listing price buyers won’t pay. Applying an SDE multiple to a business that should be valued on EBITDA can leave real money on the table.
Either way, your number is only as good as your documentation. Every add-back has to be supported by your records. A buyer’s accountant will strike anything they can’t verify, and every dollar struck comes off the price once the multiple is applied.
Common add-back mistakes
- Adding back expenses the business actually needs to operate, like a necessary employee or recurring maintenance
- Calling a cost “one-time” when it happens every year
- Adding back more than one owner’s salary in SDE
- Undocumented cash income, which buyers and lenders will not count
- Personal expenses with no receipts or clear business separation
Moving from SDE to EBITDA
One of the most effective ways to raise the value of an owner-operated business is to reduce owner dependence. Build a management team, document how the business runs and step back from daily decisions. That shifts the business toward EBITDA-based valuation and the buyers who pay higher multiples for it.
It takes time, which is why it sits at the center of a 24-month exit plan. As we explain in the 24-month window, most of the work that moves a valuation takes several quarters to show up in your numbers.
How lenders look at SDE and EBITDA
Most buyers of small and mid-sized businesses use financing, often an SBA-backed loan. Lenders care less about the headline earnings number and more about whether the business can comfortably cover its loan payments after the new owner is paid.
For an SDE-based business, a lender will typically start with your SDE, subtract a reasonable salary for the buyer and then check how many times the remaining cash flow covers the annual debt payments. If that coverage is too thin, the lender will reduce the loan amount, which means the buyer can’t pay your price without more cash down or more seller financing.
This is why inflated add-backs backfire. Even if a buyer believes them, a lender that can’t verify them won’t count them, and the deal either shrinks or falls apart late in the process. Documented, conservative earnings are what get a deal financed at your price.
Which number should you put in front of buyers?
Present the measure that fits your business and the buyers you expect to attract, and be consistent. If your business is owner-operated, lead with a well-documented SDE. If you have a management team in place and expect interest from larger acquirers, prepare an adjusted EBITDA as well, with a clear bridge showing how you got from net profit to each number. Buyers trust sellers who show their work.
Frequently asked questions
Is SDE the same as EBITDA?
No. Both start from profit and add back interest, depreciation, amortization and one-time items, but SDE also adds back one owner’s full compensation, while EBITDA deducts a market-rate salary for management. SDE is therefore higher than EBITDA for the same business.
Is SDE or EBITDA used to value my business?
Smaller, owner-operated businesses are usually valued on SDE. Larger businesses with a management team in place are usually valued on EBITDA. The deciding factor is whether a buyer would be buying a job they will do themselves or a company that runs with its own management.
Why do EBITDA multiples tend to be higher than SDE multiples?
A business valued on EBITDA already pays for its own management, so it depends less on the owner and carries less risk for a buyer. Lower risk supports a higher multiple.
What counts as an add-back?
Expenses a new owner would not have: the owner’s compensation above market rate, personal expenses run through the business, and genuinely one-time costs. Every add-back needs documentation, or a buyer will not accept it.
Can I increase my SDE before selling?
Yes, by growing profit and by cleaning up your books so legitimate add-backs are documented. Removing personal expenses from the business and keeping clear records also makes your earnings easier for a buyer and lender to verify.
Not sure which measure fits your business, or what your earnings really are? A 30-minute discovery session is $99 and is credited in full toward any engagement. If you already know you want a structured plan, see the 24-Month Exit Blueprint packages.
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