What is the difference between SDE and EBITDA?

Both measures try to answer the same question — what does this business actually earn — and they answer it for different buyers. Confusing them is the most common reason a small-business asking price looks indefensible to one party and reasonable to the other.

What SDE adds back, and why

SDE starts from net profit and adds back interest, taxes, depreciation and amortisation, then adds the owner’s compensation and discretionary personal expenses run through the business. The reasoning is that a buyer who will work in the business full-time gets that compensation back as their own income, so it is available to service debt and pay them a living.

What EBITDA deliberately leaves out

EBITDA treats management as a cost, because it is built for buyers who will not run the business themselves. If the owner works forty hours a week and the buyer intends to hire a manager, the manager’s wage is a real expense and EBITDA is the honest measure. SDE is not wrong in that scenario; it is answering a question the buyer did not ask.

Which one your deal should use

Smaller owner-operated businesses are conventionally quoted and valued on SDE, and the multiples applied to SDE are lower than those applied to EBITDA precisely because the earnings figure is larger. Mid-market deals move to EBITDA. Applying an EBITDA multiple to an SDE figure — or the reverse — produces a valuation that is wrong by a wide margin in a predictable direction.

The add-backs are where diligence happens

Whichever measure is used, each add-back is a claim that an expense will not recur for the new owner. A vehicle the business genuinely needs is not an add-back. A family member on payroll who does no work is. Ask for the schedule of add-backs line by line and test each one against whether you will actually avoid that cost.