EBITDA
EBITDA is earnings before interest, taxes, depreciation and amortization — a measure of operating profit that strips out financing and accounting choices so two businesses can be compared directly. Unlike SDE, it does not add back an owner’s salary, because it assumes the business pays a market wage for management.
EBITDA is the earnings measure used once a business is big enough to run without a working owner. It answers a different question than SDE: not "what would I earn if I ran this myself" but "what does this business produce, independent of who owns it and how it is financed".
EBITDA versus SDE
The practical difference is one salary. If a business earns $700,000 in SDE and a competent general manager would cost $150,000, EBITDA is roughly $550,000. That gap matters because multiples are not interchangeable: an EBITDA multiple is applied to a smaller number, so quoting an SDE multiple against EBITDA earnings — or the reverse — produces a price that is wrong by a wide margin.
Why buyers and lenders like it
EBITDA travels well. Because it excludes interest and tax, it lets a buyer compare a debt-free business against a leveraged one, and lets a lender model what the business can service once their own loan is layered on. It is also the measure most private-equity and strategic acquirers work in, so a seller approaching that buyer pool should expect to be assessed on it.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Business Development Bank of CanadaIndustryHow to sell your business
- 03Treadstone LawLegal commentaryHow Much Is a Small Business Worth? Valuation Basics for Ontario Buyers
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