EBITDA vs SDE: which earnings number to use
Seller's discretionary earnings (SDE) is a business's pre-tax earnings with one owner's salary, discretionary expenses and non-cash items added back, while EBITDA is earnings before interest, taxes, depreciation and amortization, usually after paying a market-rate manager.
Key takeaways
- SDE measures the total benefit available to one owner-operator.
- EBITDA assumes the business pays for management, so it measures what the company earns for its owners.
- Small owner-operated businesses are usually priced as a multiple of SDE; larger businesses as a multiple of EBITDA.
- Never compare an SDE multiple with an EBITDA multiple.
The two definitions
SDE starts with net income and adds back interest, taxes, depreciation and amortization, one owner's compensation, and one-time or personal expenses run through the business. EBITDA adds back interest, taxes, depreciation and amortization and is usually adjusted for owner compensation so that it reflects the cost of a replacement manager.
Why it matters when you read a listing
A listing that reports a headline number without saying which measure it is can mislead. A business showing $500,000 of SDE might show far less EBITDA once a general manager is paid, which changes both valuation and how much debt it can support.
Adjustments to scrutinize
Buyers should test every add-back: personal expenses, family payroll, one-time costs and owner compensation. Support each with documents during diligence rather than accepting the seller's or broker's number.
Frequently asked questions
EBITDA, because the manager's pay is already an expense. SDE is designed for businesses where the owner is the manager.
EBITDA already excludes the cost of a manager, and larger, more professionally managed companies are generally lower risk and attract more buyers, so they tend to trade at higher multiples. Both effects mean the two multiples are not comparable.
Last reviewed . General information, not legal, tax or financial advice.