When a buyer values your business they start from a profit figure. For smaller owner-operated businesses that figure is usually SDE; for larger ones it is usually EBITDA. Knowing which one applies to you explains a lot about the price you will be quoted.
What SDE means
SDE — Seller's Discretionary Earnings — exists because a small, owner-run business rarely looks as profitable on paper as it really is. Owners run a salary, a vehicle, travel, and other personal benefits through the company, so reported net profit understates what the business actually earns for the person running it.
SDE normalizes for that — on the assumption that the buyer will run the business themselves. You start with net profit and add back the owner's salary and personal expenses, plus non-operating items like interest, taxes, depreciation, and one-off costs. What's left is the full benefit one owner-operator could take home, and the multiple is applied to that figure — so getting the add-backs right directly drives the price.
What EBITDA means
EBITDA — Earnings Before Interest, Taxes, Depreciation and Amortization — measures what the business earns as a standalone operation, run by paid management rather than its owner. That makes normalization a two-way street: you add back the owner's actual pay and perks, but you also subtract a market-rate salary for the manager who would replace them. If the owner paid themselves below market, that replacement cost lowers EBITDA; if above, it lifts it.
In effect, the gap between the two measures is that manager's salary — EBITDA is roughly SDE minus the cost of hiring someone to run the business. That's why owner-dependent businesses are valued on SDE and management-run ones on EBITDA, and why the same earnings can carry a different multiple under each.
Which one applies to you
| SDE | EBITDA | |
|---|---|---|
| Typical business size | Smaller, owner-operated | Larger, management-run |
| Owner's salary | Added back | Treated as a real cost |
| What it answers | What one owner-operator earns | What the business earns on its own |
| Multiple applied | Usually lower | Usually higher |
The same business can be described either way, and the multiple is different for each — so a quoted multiple means little until you know which earnings figure it sits on. Always ask.
Rule of thumb: if the business still depends on the owner day to day, expect a buyer to value it on SDE. If it runs on a management team, expect EBITDA.