SDE vs EBITDA: Which One Values Your Business?

SDE (seller's discretionary earnings) and EBITDA (earnings before interest, taxes, depreciation, and amortization) are both ways of measuring a business's true profit, but they answer slightly different questions. SDE assumes one working owner and adds back that owner's full compensation, making it the standard for valuing small, owner-operated businesses. EBITDA assumes a management team already in place, so it does not add back an owner's salary, making it the standard for larger businesses with professional management. Most small businesses should be valued on SDE, not EBITDA.

What is the actual difference between them?

Both start from net profit and add back non-cash and one-time items. The difference is what happens to the owner's compensation:

• SDE adds back the owner's full salary and benefits, because a buyer of a small business is often going to work in the business themselves, so the "true" profit includes what the current owner is being paid to run it.
• EBITDA does not add back a working owner's salary, because it assumes the business already pays market-rate management and would keep doing so under new ownership.

If you run the numbers on the exact same small business under both methods, SDE will almost always be the larger figure, since it is adding back a real line item (owner salary) that EBITDA leaves in place.

Which one should I use to value my business?

If you are a single owner-operator, use SDE. This covers the vast majority of small businesses, including most home services, retail, restaurants, and small professional practices. Buyers of these businesses are typically other individual operators who plan to work in the business, so they value it on what it pays them, plus profit.

If you have a full management team already in place and do not personally run day-to-day operations, EBITDA is more appropriate. This is more common in businesses with several million dollars in revenue and a general manager, or businesses being marketed to private equity or strategic acquirers rather than individual buyers.

SDE assumes one working owner. EBITDA assumes a management team already runs the place.

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Why do the multiples look so different between the two?

Because SDE and EBITDA measure different-sized profit pools, the multiples applied to each are also different, and comparing them directly is a common and costly mistake. A typical small business SDE multiple runs roughly 2x to 3.5x. EBITDA multiples for larger, professionally managed businesses often run higher, frequently 4x to 8x or more depending on size and industry, because EBITDA already excludes owner pay and the business is inherently less risky to transfer. Seeing an "EBITDA multiple" quoted in an industry article does not mean your SDE-valued small business commands the same number.

What add-backs are common to both?

Regardless of which method you use, both SDE and EBITDA typically add back:

• Depreciation and amortization, since they are non-cash accounting entries, not real cash leaving the business.
• Interest expense, since a new owner will likely finance the purchase differently than the current owner finances operations.
• One-time or non-recurring expenses, such as a lawsuit settlement, a one-off equipment write-off, or storm damage.
• Above-market or below-market related-party transactions, such as rent paid to a family member at an inflated rate.

SDE goes one step further and also adds back the working owner's full compensation and any personal expenses run through the business, such as a personal vehicle, travel, or family members on payroll who do not perform real work.

A worked example

A business shows $120,000 in net profit on its tax return. The owner takes a $90,000 salary, has $15,000 of depreciation, $5,000 of interest expense, and ran $10,000 of personal expenses through the business.

• EBITDA: $120,000 + $15,000 (D&A) + $5,000 (interest) = $140,000. (Owner salary and personal expenses are not added back.)
• SDE: $140,000 + $90,000 (owner salary) + $10,000 (personal expenses) = $240,000.

Applying a small-business SDE multiple of 2.5x to the $240,000 SDE gives roughly $600,000. Applying a much higher EBITDA-style multiple to the smaller $140,000 EBITDA figure would produce a misleading comparison, since EBITDA multiples are calibrated for businesses that do not need this add-back in the first place.

Knowing which measure applies to your business, and calculating it correctly, is the first step to a real number instead of a borrowed one. SharePop Studio calculates SDE the right way for owner-operated businesses and shows the resulting valuation alongside the specific moves that would raise it.