Both SDE and EBITDA try to show what a business really earns. They differ in how they treat the owner.
SDE: seller's discretionary earnings
SDE is the money one working owner gets from the business. It adds back the owner's full pay. It suits smaller businesses where the owner does most of the work and the buyer will do the same.
EBITDA: earnings before interest, taxes, depreciation and amortisation
EBITDA assumes the business pays a manager to do the owner's job. So it is SDE less a fair market salary for that manager, including payroll taxes and benefits. Brokers call this "adjusted EBITDA". It is not the same as the EBITDA in an accountant's statements. It suits larger businesses where a buyer wants to hire a manager and stay hands-off.
Worked example
| Amount | |
|---|---|
| Profit before tax | $90,000 |
| Plus owner's pay | $70,000 |
| Plus interest | $5,000 |
| Plus depreciation | $10,000 |
| Plus one-off and personal costs | $5,000 |
| SDE | $180,000 |
| Less pay for a manager | $60,000 |
| Adjusted EBITDA | $120,000 |
Use the business valuation calculator to see both for your numbers.
Only one owner's pay
SDE adds back the pay of one working owner. If two owners work in the business, the second one is treated as a paid employee at a fair market salary.
Add-backs: be honest
An add-back is a cost a new owner would not have. Good examples are a family member's car, a one-off legal bill, or a personal trip run through the business. Buyers will ask for proof, so only count what you can show. Inflated add-backs hurt trust.
Which to use
| Situation | Usual choice |
|---|---|
| Owner works in the business full time, value under about $2 million | SDE |
| Business can run with a hired manager | EBITDA |
| Larger business with a management team | EBITDA |
The multiples are different too. Use the multiple that goes with the measure. An SDE multiple on an EBITDA figure will give the wrong answer. This is general information, not financial advice.
Business valuation calculator See SDE and EBITDA for your own business.Sources
- BizBuySell: Insight Report (small business sale data)
- IBBA and M&A Source: Market Pulse report
- IRS: Valuation of assets
This article is for education and is not financial, tax or legal advice. Figures are checked against the sources above and may change. Read the full disclaimer.