What is the difference between SDE and EBITDA?

How do you calculate each one?

Both start from pre-tax net income on the business's financial statements or tax return.

EBITDA (earnings before interest, taxes, depreciation and amortization):

1. Pre-tax net income
2. + interest expense
3. + depreciation and amortization
4. + one-time, non-recurring expenses (adjusted EBITDA)
5. ± the difference between what the owner is paid and what a hired manager would cost

SDE (seller's discretionary earnings):

1. Adjusted EBITDA before any owner-pay adjustment
2. + one owner's salary, payroll taxes and benefits
3. + owner perks run through the business that a new owner would not incur

SDE answers: how much cash does this business produce for one full-time owner-operator, before debt? EBITDA answers: how much does it produce for an owner who hires someone to run it?

Worked example: one business, two numbers

A service business with these figures (illustrative):

• Pre-tax net income: $180,000
• Owner's salary: $120,000, plus $15,000 of benefits
• Interest: $20,000
• Depreciation and amortization: $40,000
• One-time legal settlement: $10,000
• Cost to hire a general manager to replace the owner: $150,000 including benefits

The arithmetic:

1. SDE = $180,000 + $120,000 + $15,000 + $20,000 + $40,000 + $10,000 = $385,000.
2. EBITDA before owner adjustment = $180,000 + $20,000 + $40,000 + $10,000 = $250,000. This leaves the owner's $135,000 in as a cost.
3. A manager costs $150,000, which is $15,000 more than the owner takes. Adjusted EBITDA = $250,000 − $15,000 = $235,000.
4. Value at the BizBuySell all-sector average of 2.57x SDE: $385,000 × 2.57 = $989,450.
5. That same price as a multiple of adjusted EBITDA: $989,450 ÷ $235,000 = 4.21x.

One price, two multiples. A 2.57x SDE price and a 4.21x EBITDA price describe the same deal here.

What goes wrong when buyers mix them up?

The common mistake is applying an EBITDA multiple to SDE. Using the same business:

1. A buyer reads that small businesses sell at 4.5x EBITDA, the GF Data 2024 median for $1 million to $10 million of enterprise value.
2. The broker's listing shows $385,000 of "cash flow," which is SDE.
3. $385,000 × 4.5 = $1,732,500.
4. Overpayment versus the 2.57x SDE value: $1,732,500 − $989,450 = $743,050.

The reverse mistake hurts sellers: $235,000 of EBITDA × 2.57 = $603,950. Always ask which earnings figure a multiple was built on before you use it.

Two more cautions. EBITDA adds back depreciation, but trucks, equipment and software still have to be replaced. Subtract real capital spending before you decide what the business can pay. And SDE adds back only one owner. A second family member on payroll who does real work is a cost, not an add-back.

When do buyers switch from SDE to EBITDA?

Above roughly $1 million of earnings, buyers switch to EBITDA, treat the owner's salary as a cost, and multiples rise. The reason is practical. A business that size usually needs a manager, and the buyer is often an investor or an existing company rather than an owner-operator.

An illustration of the step-up at the threshold:

1. SDE: $1,200,000. Valued at 2.57x SDE: $3,084,000.
2. Replace the owner with a $150,000 manager: EBITDA = $1,200,000 − $150,000 = $1,050,000.
3. Valued at GF Data's 4.5x median: $1,050,000 × 4.5 = $4,725,000.
4. Difference: $4,725,000 − $3,084,000 = $1,641,000.

The same earnings are worth more once the business is big enough to be run by a manager and bought on EBITDA. That gap is why holding companies try to buy owner-run businesses on SDE and build a platform that is valued on EBITDA. It is also why sellers near the threshold argue for EBITDA pricing. For an SBA deal at a $3 million price or more, a lender-commissioned Quality of Earnings report will test whichever figure you use.

If you already own a business

When you buy a second business, neither figure is quite the right one for you. What matters is how much the target adds to your company's EBITDA after you integrate it. If your existing managers can absorb the work the seller did, you may not need to replace the seller's full salary. If you need a new site manager, you do.

Do not pay the seller for savings that only you can create. Price the target on its own stand-alone earnings, using the measure that fits its size. Keep the integration savings as your margin of safety. If they do not appear, you have still paid a fair price.

Where these numbers come from: The 2.57x SDE average and the switch to EBITDA above roughly $1 million are from Beancount's analysis of BizBuySell data. The 4.5x EBITDA median is GF Data 2024 via Carry and Conquer. The QoE threshold is from SBA SOP 50 10 8.1 as summarized by Beancount. Example figures are illustrative. SOP 50 10 8.1 applies to loans that receive an SBA loan number on or after October 1, 2026 (SBA Information Notice 5000-880695).

Related questions

Which figure does an SBA lender use?

The lender tests whether historical cash flow covers all debt service at least 1.25x for an Initial Acquisition. Lenders generally measure coverage after paying the new owner a salary. Ask your lender what salary it assumes, because that choice moves coverage.

Can SDE include two owners' salaries?

No. SDE adds back one owner's salary and benefits. If two people work full time in the business, one of them is a cost you will have to replace.

Is EBITDA the same as cash flow?

No. EBITDA ignores capital spending, changes in working capital, taxes and debt payments. It is a starting point for cash flow, not a substitute.

Why do listings show SDE instead of EBITDA?

Most Main Street buyers will run the business themselves, so SDE shows what they will take home before debt. It is also the larger number.

What comes next

Both figures depend on add-backs, and add-backs are where sellers stretch. See which add-backs are legitimate and which to question.

Related articles

• How are small businesses valued?
• Which add-backs are legitimate, and which should you question?
• How do you tell a good deal from a bad deal?
• What's the multiple difference between an add-on and a platform?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.