Understand the critical differences between EBITDA and SDE for accurate business valuations and when to use each metric
Calculate Your Business Value| Factor | EBITDA | SDE |
|---|---|---|
| Best For | Larger businesses ($5M+ revenue) | Smaller businesses (Under $5M revenue) |
| Owner Involvement | Professional management | Owner-operated businesses |
| Owner Compensation | Market-rate salary included | Total owner compensation added back |
| Personal Expenses | Not typically added back | Personal expenses added back |
| Typical Multiples | 3x - 8x EBITDA | 1.5x - 4x SDE |
| Buyer Perspective | Strategic/financial buyers | Individual buyers |
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a company's operating performance that excludes the effects of financing and accounting decisions. EBITDA adds back significant non-cash expenses, primarily depreciation and amortization, which reflect accounting decisions rather than actual cash outlays in a given period.
SDE stands for Seller's Discretionary Earnings. It represents the total financial benefit that one full-time owner-operator derives from the business, including salary, benefits, and discretionary expenses. SDE adds back the compensation for a single owner/operator, including salary and any personal benefits run through the company.
For this owner-operated business, SDE shows higher earnings ($375k vs $275k) because it includes the owner's total compensation. However, a new buyer must budget for hiring a replacement manager, affecting the true cash flow available.
Using EBITDA for small owner-operated businesses or SDE for larger companies with professional management.
Not properly documenting or justifying expense adjustments and add-backs.
Not considering what buyers in your market expect to see.
Adding back expenses that a new owner would legitimately incur.
When using SDE to value a business for a buyer, it's crucial to subtract a market-rate salary for a manager who would replace the owner's operational duties. SDE shows the total cash flow available, but a new owner needs to account for the cost of running the business.
Understand whether your typical buyer expects EBITDA or SDE calculations based on your industry and market expectations.
Maintain detailed records supporting every expense adjustment or add-back.
Calculate both to understand different buyer perspectives on your business.
Work with a valuation professional to ensure accurate calculations. Learn how to choose the right appraiser.
Yes, calculating both metrics can provide valuable insights into how different types of buyers might view your business. However, choose the metric that's most appropriate for your business size and target buyer market for your primary valuation.
Common SDE add-backs include owner's salary and benefits, personal expenses run through the business (car payments, travel, meals), one-time expenses, and non-cash expenses like depreciation. All add-backs must be well-documented and reasonable. For detailed guidance, see our comprehensive adjustment guide.
EBITDA multiples appear higher because EBITDA is typically a smaller number (since it doesn't add back owner compensation). However, the actual business values calculated using appropriate multiples for each metric should be comparable when done correctly.
Learn how to properly adjust EBITDA for one-time expenses and normalization items.
Learn MoreUnderstand how valuation multiples are determined for different business types.
Learn MoreTry our free calculator to estimate your business value using both metrics.
Try CalculatorGet professional guidance on which metric is right for your business and ensure accurate calculations for valuation purposes.