Short answer
- SDE adds back one owner's full pay. It's what the business pays an owner-operator.
- EBITDA keeps a market-rate manager's pay as an expense. It's what the business earns if someone else runs it.
- SBA lenders effectively use the EBITDA view, so price your business on it if your buyer will finance.
The two definitions
| SDE | EBITDA | |
|---|---|---|
| Starts with | Pre-tax profit | Pre-tax profit |
| Adds back | Interest, depreciation, amortization, one-time and personal costs, and one owner's full salary and benefits | Interest, taxes, depreciation, amortization, and one-time costs |
| Owner pay | Excluded: it's part of what the buyer is buying | Included as a market-rate management expense |
| Typical use | Owner-operated businesses, usually under about $1M of earnings | Larger businesses with management in place; private equity |
The short version: SDE is what the business pays one full-time owner-operator. EBITDA is what it earns after paying someone else to run it.
Same business, two numbers
| Pre-tax profit | $420,000 |
|---|---|
| + Interest and depreciation | $60,000 |
| + One-time and personal costs | $45,000 |
| = Adjusted EBITDA (owner paid at market) | $525,000 if the owner's $180,000 were already a market wage |
| + Owner salary and benefits | $180,000 |
| = SDE | $705,000 |
If the owner's $180,000 package is above what a general manager would cost, say $110,000, the adjusted EBITDA is $705,000 minus $110,000, or $595,000. That's the number a buyer who won't run the business will pay for, and it's the one that matters to an SBA lender.
Why the multiples look different
SDE multiples are usually lower than EBITDA multiples for the same business, because SDE is the bigger number. A business might trade at 3x SDE or 4x to 5x EBITDA and land at a similar price. Comparing an SDE multiple from one deal to an EBITDA multiple from another is one of the most common mistakes owners make when they price their own business.
Which one should you use?
- You work in the business full time and it depends on you: buyers will start from SDE, then most will subtract what it costs to replace you.
- You have a general manager and could step away: EBITDA is the right lens, and you'll attract a wider set of buyers.
- Your buyer uses an SBA loan: the lender tests 1.25x debt coverage on cash flow after a reasonable salary for whoever runs the business. Effectively, that's adjusted EBITDA.
Common add-back mistakes
- Adding back a family member's salary when that person does real work a buyer would have to pay for.
- Calling recurring costs "one-time" because they were lumpy, like equipment repairs every year.
- Adding back the owner's salary and also claiming the owner doesn't need replacing.
- Ignoring under-market rent paid to an owner-related landlord, which a buyer will have to pay at market.
Run your own numbers with the free Value Snapshot, which shows SDE and the earnings a buyer will actually pay for side by side.
FAQ
What is the difference between SDE and EBITDA?
SDE adds back one owner's full salary and benefits; EBITDA treats a market-rate salary for management as an expense. For the same business, SDE is higher by roughly the cost of the owner's role.
When is SDE used instead of EBITDA?
SDE is typical for owner-operated businesses, usually under about $1M of earnings. EBITDA is used for larger businesses with management in place and by private equity buyers.
Why are SDE multiples lower than EBITDA multiples?
Because SDE is the larger number. A business can trade at a lower SDE multiple or a higher EBITDA multiple and end up at a similar price.
Which earnings number do SBA lenders use?
Lenders test debt coverage on cash flow after a reasonable salary for whoever runs the business, which is effectively adjusted EBITDA, not SDE.
Sources
This guide is general information, not legal, tax or lending advice. SBA rules and Florida law change; confirm current terms with your lender, attorney and CPA.