SDE vs. EBITDA, and how to calculate SDE.
The difference between seller’s discretionary earnings (SDE) and EBITDA, which one buyers use for your business, and a worked example of how to calculate SDE with add-backs.
SDE (seller’s discretionary earnings) is the total cash benefit a business produces for one full-time owner-operator: pre-tax profit plus the owner’s salary, interest, depreciation and amortization, and documented personal or one-time expenses. EBITDA is earnings before interest, taxes, depreciation, and amortization, after paying a market-rate manager to run the business. Owner-operated Main Street businesses, roughly under $1 million of earnings, are usually priced on a multiple of SDE. Larger businesses with a management team are priced on a multiple of EBITDA.
The one-line difference
SDE assumes the buyer will run the business personally, so it adds the owner’s pay back into earnings. EBITDA assumes someone is paid a fair salary to run it, so that salary stays as an expense. On the same business, SDE is always higher than EBITDA by roughly the cost of a replacement manager. That is why the multiples look different too: SDE multiples for small businesses are typically lower than EBITDA multiples for larger ones, and comparing an SDE multiple to an EBITDA multiple is one of the most common valuation mistakes owners make.
How to calculate SDE, step by step
Start with pre-tax net profit from your tax return or profit and loss statement. Add back one owner’s salary, payroll taxes, and benefits. Add back interest expense, depreciation, and amortization, since those depend on how you financed and accounted for the business rather than on how it performs. Then add back expenses that are genuinely personal or one-time, such as a family vehicle run through the business, a one-off legal settlement, or a remodel that will not repeat. Every add-back needs a document behind it, because a buyer’s lender will ask. Our guide on preparing your business to sell covers how to build that file.
A worked example (illustrative)
Take a Rio Grande Valley HVAC company with $210,000 of pre-tax profit. The owner pays himself $95,000, plus $9,000 of payroll taxes and benefits. Interest on the truck loans is $14,000, depreciation is $38,000, a one-time lawsuit settlement cost $12,000, and the owner’s personal truck and phone run through the books at $11,000 a year. SDE is $210,000 + $95,000 + $9,000 + $14,000 + $38,000 + $12,000 + $11,000 = $389,000. If a market-rate general manager would cost $85,000 with taxes and benefits, EBITDA on the same business is about $304,000. All figures are illustrative, not a quote or a valuation.
Which number a buyer will use for your business
If the buyer will step in and run the business day to day, which is most individual and SBA-backed buyers, expect SDE. If the buyer is a private equity platform, a family office, or a strategic acquirer that will keep or install a manager, expect EBITDA. Businesses in the overlap, often $750,000 to $2 million of earnings, may see both, and a good broker prices the business for the buyer pool most likely to pay the most. See how much your business is worth for how multiples move.
Add-backs that do not survive diligence
Buyers and lenders reject add-backs that recur every year, that a new owner would still need to pay, or that have no paper trail. Cash revenue that never hit the books is the biggest one: if it is not on the tax return, a lender will not finance it and most buyers will not pay for it. Excessive owner perks, family members on payroll who actually work, and “one-time” expenses that show up three years running are other common examples. Getting a defensible SDE before you list, through a confidential valuation, avoids a retrade halfway through diligence.