Almost every argument about what a business is worth is really an argument about which earnings number is being used. SDE and EBITDA measure different things, are used by different buyers, and carry different multiples. Comparing a price built on one against a multiple drawn from the other is the most common way people reach a number that was never real.
In short
- SDE adds one owner's pay and benefits back into profit. EBITDA does not, because it assumes a paid manager stays.
- The same business can honestly report two different earnings figures. The multiple applied to each is different too.
- A multiple is meaningless until you know which earnings figure it applies to and where that figure came from.
What each number is actually asking
Seller's discretionary earnings asks: how much money does this business produce for one owner-operator who works in it? It starts at pre-tax profit and adds back that owner's salary, their personal benefits run through the business, interest, depreciation, amortization, and one-off costs that will not repeat.
EBITDA asks a different question: how much does this business produce as a standalone operation, with professional management already paid for? It adds back interest, taxes, depreciation and amortization — but not the owner's compensation, because a buyer who will not work in the business still has to pay someone to run it.
Neither is a trick. They serve different buyers. Someone buying a job needs to know what the job pays. Someone buying an asset needs to know what it earns without them.
The same business, both ways
Consider a business with $1,200,000 of revenue, $150,000 of pre-tax profit, an owner drawing $110,000 in salary, $18,000 of personal vehicle and phone costs running through the accounts, $40,000 of depreciation, and $22,000 of interest on an equipment loan. There was also a $30,000 legal cost from a dispute that has been settled.
| Line | SDE | EBITDA |
|---|---|---|
| Pre-tax profit | $150,000 | $150,000 |
| Add: interest | $22,000 | $22,000 |
| Add: depreciation & amortization | $40,000 | $40,000 |
| Add: owner salary | $110,000 | not added back |
| Add: owner personal expenses | $18,000 | not added back |
| Add: non-recurring legal cost | $30,000 | $30,000 |
| Result | $370,000 | $242,000 |
Both figures are honest. They answer different questions, and a buyer who mixes them up will misprice the business by more than a hundred thousand dollars before anyone has negotiated anything.
Why this decides the price, not just the presentation
Small owner-operated businesses are usually quoted as a multiple of SDE, and those multiples are typically low single digits. Larger businesses are quoted on EBITDA at higher multiples, because more buyers compete for them, lenders will finance them, and they do not depend on one person.
That is why the same profit is worth more inside a larger company, and why combining several small businesses can create value even when nothing about the operations improves. It is also why applying a larger company's multiple to a small company's SDE produces a number that no buyer will honour.
- Ask which figure a quoted multiple applies to before comparing anything
- Expect SDE to be the larger number and the smaller multiple
- Treat any valuation that does not name its earnings basis as incomplete
Where add-backs stop being defensible
Add-backs are the most disputed part of any earnings figure, and they are where diligence usually finds the gap. The test is not whether a cost was unusual — it is whether the new owner will genuinely avoid it.
A settled lawsuit is a fair add-back. A marketing spend the business needs to keep revenue flat is not, even if the owner considers it discretionary. An owner's above-market salary is normalized to what a replacement would actually cost, which for a working owner is rarely zero.
- One-off and genuinely finished: usually defensible
- Recurring but inconvenient: usually not
- Owner labour: replaced at market cost, not removed
- Family members on payroll below or above market: normalized both ways
Where the number came from matters as much as the number
A figure a seller calculated in a spreadsheet, a figure their accountant compiled, and a figure a buyer reconstructed from tax returns and bank statements are three different kinds of evidence, even when they agree.
Ask for the bridge: start at the tax return, walk line by line to the adjusted figure, and see each adjustment supported by something. A seller who can produce that bridge is easier to buy from, and generally gets a better price for exactly that reason.
Common questions
- Is SDE or EBITDA higher for the same business?
- SDE is almost always higher, because it adds the owner's salary and personal benefits back into earnings while EBITDA does not. A business with $242,000 of EBITDA and an owner paid $110,000 might show roughly $370,000 of SDE. The higher figure carries a lower multiple, so the two often produce similar valuations — and wildly different ones if they are mixed up.
- Which one will a buyer use?
- It depends on what they intend to do. An individual buying a business to run themselves will work in SDE, because it tells them what the business pays them. A private equity firm or a strategic acquirer will work in EBITDA, because they are paying a manager and want to know what the business earns without an owner in it.
- At what size does the conversation switch from SDE to EBITDA?
- There is no fixed line, and anyone quoting one precisely is guessing. In practice the switch happens as businesses grow past the point where one owner-operator can run them and a real management layer exists. Around the low millions of revenue you will see both figures quoted for the same business.
- Can a seller just present the higher number?
- They can present either, provided it is labelled and the calculation is shown. Presenting SDE while quoting EBITDA multiples is not a presentation choice, it is an error that diligence will find, and it usually costs the seller credibility on everything else in the file.
This is general information, not investment, legal, tax or valuation advice. Every business and every transaction differs; take professional advice on your own circumstances before acting.