SDE vs EBITDA: which one values a small business?
SDE (seller's discretionary earnings) adds one working owner's entire compensation back to profit; EBITDA adds back only the part of that compensation above what it would cost to hire someone to do the job. On the worked accounts below, the same business produces SDE of $226,000 and adjusted EBITDA of $161,000 — and the $65,000 gap between them is exactly the market salary of the owner's own role, which is the whole difference between the two metrics.
The two definitions
EBITDA is earnings before interest, tax, depreciation and amortisation. Start at net profit and add back those four. It is meant to describe what the business earns independently of how it is financed, where it is taxed and how old its assets are.
SDE is EBITDA plus one working owner's entire package — salary, benefits, and the personal costs run through the business. It is meant to describe the total financial benefit available to a single owner-operator who works in the business.
Both are usually presented adjusted or normalised: one-off costs and genuinely non-recurring items stripped out so the figure describes an ordinary year. The adjustments are the same in both; what differs is the treatment of the owner.
One set of accounts, both metrics
A business with revenue of $900,000 and a pre-tax net profit of $95,000. Sitting inside those costs are: owner's salary $85,000, interest $9,000, depreciation and amortisation $18,000, a one-off legal matter $7,000, and $12,000 of the owner's personal expenses run through the business. To replace the owner's actual role on the open market would cost $65,000.
| Line | SDE | Adjusted EBITDA |
|---|---|---|
| Pre-tax net profit | $95,000 | $95,000 |
| + Interest | $9,000 | $9,000 |
| + Depreciation & amortisation | $18,000 | $18,000 |
| + One-off legal costs | $7,000 | $7,000 |
| + Owner's personal expenses | $12,000 | $12,000 |
| + Owner's compensation | $85,000 (all of it) | $20,000 ($85,000 − $65,000 market rate) |
| Result | $226,000 | $161,000 |
$226,000 − $161,000 = $65,000: the market cost of the owner's role, and nothing else. That is not a coincidence, it is the definition. SDE says "here is everything one owner-operator gets"; EBITDA says "here is what the business earns after paying someone to do that job".
Two notes on the arithmetic. If your net profit figure is already after tax, add the tax back as well — EBITDA is a pre-tax measure. And if two owners both work in the business, only one owner's compensation is added back in SDE; the second is a real cost of running it.
Why mixing them up is a six-figure error
Multiples are quoted against a metric. An "SDE multiple" and an "EBITDA multiple" are different numbers for the same business, because the earnings figure underneath them is different. Applying one to the other does this:
| Sum | Result | Verdict |
|---|---|---|
| 2.5 × SDE ($226,000) | $565,000 | Correct pairing |
| 2.5 × adjusted EBITDA ($161,000) | $402,500 | Understates by $162,500 (28.8%) |
| 3.5 × adjusted EBITDA ($161,000) | $563,500 | Correct pairing |
| 3.5 × SDE ($226,000) | $791,000 | Overstates by $227,500 (40.4%) |
Note the first and third rows: 2.5× SDE and 3.5× EBITDA land within $1,500 of each other on this business. A higher multiple is not a higher valuation if it is applied to a smaller earnings figure. Whenever you read or are quoted a multiple, the first question is not "is that high or low" — it is "a multiple of what?"
Which one applies to your business
The convention follows who is expected to run the business afterwards, not the size of the revenue.
- SDE is used where the buyer will step into the owner's job: owner-operated businesses, typically sold to an individual buyer who intends to work in it. The buyer is buying an income, so they want the whole owner benefit figure.
- EBITDA is used where the business already has management in place and the buyer will not work in it: corporate, private-equity and larger trade buyers. They must pay a manager regardless, so the manager's salary is a real cost and cannot be added back.
Where the two audiences overlap, businesses are frequently presented both ways, and both are legitimate. What is not legitimate is presenting SDE, calling it EBITDA, and attaching an EBITDA multiple to it.
Add-backs that survive contact with a buyer
Both metrics live or die on their adjustments, and overstated add-backs are the fastest way to lose a buyer's trust part-way through a process. The categories that hold up are narrow: compensation above market rate for the role; genuinely one-off costs (a lawsuit, a flood, a one-time system migration — not "an unusual year"); documented personal expenses run through the business; and the difference between related-party rent and genuine market rent.
The test worth applying to each one: could you explain it in a single sentence to a stranger, and produce a document that supports it? A buyer's accountant will challenge every add-back individually, and the ones that survive are the ones you were conservative about before anyone asked. On the worked example, an owner who pushed the personal-expenses add-back from a documented $12,000 to an optimistic $25,000 would raise SDE by $13,000 and, at 2.5×, the asking price by $32,500 — then have to defend $13,000 of undocumented spending at exactly the moment credibility matters most.
From an earnings multiple to what you receive
A multiple gives enterprise value, not the money that reaches you. The bridge is:
Equity value = enterprise value − debt + cash
On the worked business, at 2.5× SDE with $120,000 of debt and $35,000 of cash:
$565,000 − $120,000 + $35,000 = $480,000
And that is still before deal costs, before any part of the price that is deferred or tied to earn-out targets, and before tax on the proceeds. A headline price and a bank balance are different numbers, and the gap is routinely a fifth or more of the headline.
What this page deliberately does not tell you
It does not tell you what multiple your business will fetch. Real multiples move on industry, size, growth, customer concentration, recurring revenue, how dependent the business is on the owner, and who happens to be buying in your sector this year — and a figure invented to sound authoritative would be worse than no figure. The 2.5× and 3.5× above are there to demonstrate the arithmetic, not to suggest a market rate.
What you can do without anyone's help is get the earnings figure right, know which metric you are quoting, and model a range rather than a point. A business modelled from 1.5× to 5.0× tells you how sensitive your own outcome is to the one variable you cannot control, which is considerably more useful than a single confident number.
Arithmetic and general information only — not financial, tax, legal or investment advice. Your own figures, and your own accountant, decide what any of this means for you.
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Frequently asked questions
What is the difference between SDE and EBITDA?
SDE adds one working owner's entire compensation back to earnings; EBITDA adds back only the amount above the market rate for that role. On a business with an $85,000 owner salary and a $65,000 market replacement cost, SDE comes to $226,000 and adjusted EBITDA to $161,000 — a gap of exactly the $65,000 replacement salary.
What is the SDE formula?
SDE = pre-tax net profit + interest + depreciation + amortisation + the owner's full compensation + documented personal expenses run through the business + genuinely non-recurring costs. If your profit figure is already after tax, add the tax back too, and if two owners work in the business only one owner's compensation is added back.
Which metric should I use to value my business?
It follows who will run the business afterwards. SDE is the convention where the buyer steps into the owner's job — owner-operated businesses sold to an individual. EBITDA is the convention where management is already in place and the buyer will not work in it, because a manager's salary is then an unavoidable cost.
Can I apply an EBITDA multiple to an SDE figure?
No — it produces a large error in whichever direction you get it wrong. On the worked example, applying a 3.5x EBITDA multiple to SDE gives $791,000 against a correctly paired $563,500, an overstatement of 40.4%. Always ask what metric a quoted multiple is a multiple of.
What add-backs will a buyer actually accept?
Narrow, documented ones: compensation above market rate for the role, genuinely one-off costs, personal expenses run through the business that you can evidence, and the gap between related-party rent and market rent. A buyer's accountant will challenge each one, so the practical test is whether you can explain it in a sentence and produce a document for it.
Does an earnings multiple tell me what I will receive?
No. A multiple gives enterprise value; equity value is enterprise value minus debt plus cash. At 2.5x SDE of $226,000 with $120,000 of debt and $35,000 of cash, that is $565,000 − $120,000 + $35,000 = $480,000, and that is still before deal costs, deferred consideration and tax on the proceeds.