SDE vs EBITDA

Both SDE and EBITDA start from a business’s reported earnings and adjust them to show what the business actually generates before financing and ownership decisions are layered on top. The adjustment each makes to owner compensation is where they diverge, and that single difference is why a business advertised on one basis can look very different once measured on the other. Knowing which figure is being used, and why, matters more than the number itself.

Seller’s discretionary earnings (SDE)

SDE takes reported profit and adds back the owner’s salary, benefits and personal expenses run through the business, along with interest, tax, depreciation and one-time items, on the assumption that a single owner-operator will step in and do the work themselves. It is the standard measure for small, owner-run businesses, because it answers the question a hands-on buyer actually has: what will this business pay me if I run it myself.

• Adds back the full value of owner compensation, not a market-rate estimate of it
• Assumes the buyer will personally replace the owner’s labour, not hire a manager
• Used almost universally when pricing smaller, owner-operated businesses
• A multiple applied to SDE is not comparable to one applied to EBITDA, since the earnings base differs

EBITDA

EBITDA starts from the same reported profit but adds back only interest, tax, depreciation and amortization, leaving management compensation in place at whatever rate is actually being paid. That makes sense once a business is large enough to be run by paid managers rather than a single owner, because a buyer stepping in is acquiring a management team and a system, not a job. It is the measure most private equity and strategic acquirers work in.

• Assumes market-rate management is already an ongoing cost of the business
• Travels well across businesses of different sizes and ownership structures
• The standard measure once a business is large enough to be professionally managed
• Comparing an SDE figure directly against an EBITDA multiple, without adjusting first, misstates value

How to choose

Which figure fits depends on how the business is actually run, not on which number looks better. A small operation where the owner works in the business every day is normally priced on SDE, because that is the earnings figure a hands-on buyer will actually experience. A business with a general manager and a team already running day-to-day operations, where the owner’s departure would not change how the business functions, sits closer to an EBITDA business. Ask which measure a specific listing or valuation is using before comparing it to anything else, and have an accountant confirm the add-backs are genuinely one-time or personal rather than ordinary costs of running the business.