SDE vs EBITDA: which one applies to your business

SDE and EBITDA are both starting points for an earnings multiple, and they are commonly confused because they sound like two ways of measuring the same thing. They are not interchangeable, and using the wrong one — or comparing a multiple quoted against one to a business measured on the other — produces a number that is quietly wrong, sometimes by a wide margin. The one that applies to your business is decided by a fairly narrow question: is the owner’s full personal compensation part of what a buyer is really paying for, or has it already been separated out as a real operating cost.

What each figure actually adds back

Seller discretionary earnings starts from net profit and adds back the owner’s total compensation and benefits, one owner’s personal expenses run through the business, interest, tax, depreciation and amortization, and any genuinely one-time items. EBITDA — earnings before interest, tax, depreciation and amortization — adds back only those last four items. It does not add back an owner’s salary, because EBITDA assumes the business already pays market-rate compensation for every role performed, including whatever work the owner does. That single difference is the whole story: SDE assumes a buyer steps directly into the owner’s job, EBITDA assumes the owner’s job is already staffed and priced like any other position.

Why the size of the business decides the answer

A business the owner runs personally — working the counter, doing the sales calls, signing every cheque — genuinely cannot separate an "owner’s job" from "the business," so SDE is the honest way to describe its cash flow, and it is the metric most small business listings, brokers and buyers default to. Once a business has grown to the point where it employs a general manager or a layer of management, and the owner’s remaining involvement looks more like a board-level or advisory role than a full working job, EBITDA becomes the more accurate lens, because by then the owner’s compensation is closer to a discretionary dividend than an operating cost the business genuinely depends on.

The transition zone is where mistakes happen

Many Canadian small and mid-sized businesses sit in between — an owner still working most weeks, but with a manager or senior staff absorbing part of what used to be entirely the owner’s job. In this zone, neither pure SDE nor pure EBITDA describes the business cleanly. A common, defensible approach is to add back only the portion of owner compensation that exceeds what a market-rate replacement would cost to do the same work, leaving the rest as a real operating expense. Doing this honestly, rather than adding back the owner’s entire salary out of habit because "that’s how SDE works," is one of the clearest signals to a buyer that the numbers were built carefully rather than to flatter the asking price.

A multiple quoted for one is not a multiple for the other

General industry commentary discusses SDE multiples and EBITDA multiples as separate ranges, and for good reason: because SDE is a larger number than EBITDA for the same business, an SDE multiple has to be correspondingly lower to reach the same implied value, and an EBITDA multiple is correspondingly higher. Applying an EBITDA-style multiple to an SDE figure, or the reverse, produces a valuation that can be dramatically wrong, and it is a mistake even experienced owners make when they read industry commentary casually rather than checking which earnings base a quoted range was built against.

What buyers and lenders actually do with the difference

A lender underwriting an acquisition loan cares about which figure is being used, because it changes what debt the resulting cash flow can service after a new owner also has to pay themselves. A buyer intending to run the business personally reads an SDE figure as roughly what the job is worth to them, on top of a return on their investment. A financial buyer intending to install a manager reads EBITDA as closer to the real return they will actually receive, since they are not planning to work in the business themselves. Knowing which kind of buyer you are marketing to changes which figure you should be leading with.

• SDE adds back the owner’s full compensation; EBITDA does not
• Owner-operated businesses are usually described in SDE; managed businesses in EBITDA
• The transition zone often needs a partial, market-rate-based add-back, not an all-or-nothing one
• A multiple range for one metric cannot be applied to the other
• Confirm which figure any quoted multiple or range was built against before comparing