SDE vs. EBITDA: Which Earnings Number Sets Your Price?

EBITDA is earnings before interest, taxes, depreciation, and amortization — a measure of operating profitability independent of capital structure. SDE, or Seller's Discretionary Earnings, takes EBITDA and adds back the owner's full compensation and benefits.

The logic: a small business buyer who will run the company themselves cares about the total financial benefit available to a single working owner. A larger buyer who will keep a management team in place cares about profit after paying that team a market wage.

As a rule of thumb, businesses with SDE under roughly $1M and a hands-on owner are valued on SDE. Larger businesses with a management team that runs day-to-day operations are valued on adjusted EBITDA.

This matters because SDE multiples and EBITDA multiples are not interchangeable — an SDE multiple is lower because SDE is a larger number. Mixing them up can misprice a business badly in either direction.

Both measures rely on add-backs — adjustments that restate the financials to a buyer's economic reality. Legitimate add-backs include above-market owner salary, genuine one-time expenses, and clearly personal costs run through the business.

Wishful add-backs — vague 'efficiencies,' undocumented cash, or recurring costs dressed up as one-time — get stripped out in due diligence, damaging both your price and your credibility. Every add-back should be documented and defensible.