SDE vs. EBITDA: The Two Languages of Small-Business Valuation
Two buyers look at the same P&L and quote two different earnings numbers. Neither is lying. One is speaking SDE, the other EBITDA, and if you're a founder heading into a sale conversation, the difference can be worth six figures. Here's the translation guide.
- SDE (seller's discretionary earnings) = profit + owner's salary + owner perks + one-time costs. It answers: what does this business put in one owner-operator's pocket?
- EBITDA assumes a manager must be hired to replace you — so a market-rate salary stays IN the costs. It answers: what does this business earn as a standalone company?
- SDE is the standard under roughly $1M of earnings; EBITDA takes over above it. In between, expect buyers to argue for whichever favors them.
- SDE is always the larger number — which is why "3x" means nothing until you know 3x of what.
The worked example
| Line | Amount | SDE Treatment | EBITDA Treatment |
|---|---|---|---|
| Net profit (books) | $210,000 | start here | start here |
| Owner salary | $90,000 | add back | replace with $70K market-rate manager: add back $20K |
| Owner health insurance + truck | $18,000 | add back | add back (personal expense) |
| One-time website rebuild | $25,000 | add back | add back |
| Interest + depreciation | $12,000 | add back | add back (the I, D & A) |
| Result | $355,000 SDE | $285,000 adj. EBITDA |
Same business: $355K of SDE or $285K of adjusted EBITDA. At a 3.5x multiple that's $1.24M vs. $1.0M — a quarter-million-dollar spread created entirely by which language the deal is negotiated in. Sophisticated buyers know this; now you do too.
The add-back rules of the road
Legitimate: owner compensation (SDE), genuinely personal expenses run through the business, true one-time events (a lawsuit, a rebrand, a move), and non-cash charges. Contested: "one-time" marketing experiments that happen every year, family members on payroll who do real work, and aggressive home-office allocations. Disqualifying: add-backs without receipts. Every contested add-back doesn't just lose its own dollar — it taxes the credibility of every clean one next to it.
Buyers don't price the earnings you claim. They price the earnings they can verify, times the trust your books earn.
Run your own numbers in our free EBITDA / SDE calculator — it walks the add-back schedule line by line, then feeds the valuation estimator.
- We quote both numbers in every conversation and show the bridge between them — founders should never discover the difference at the LOI stage.
- Clean books before a sale routinely return 10–50x the bookkeeper's fee in enterprise value. Cheapest value-creation in M&A.
Method reflects standard practice across SMB brokerage and search-fund underwriting (Quiet Light, Empire Flippers, FE International guidance). Example is illustrative, not financial advice.
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