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The Monet Blog · Entrepreneurship

SDE vs EBITDA: which number a small business is actually priced on

Seller's discretionary earnings and EBITDA measure different things, carry different multiples, and quietly decide what you pay for a business.

By Sankha NagChoudhurySeptember 17, 20268 min read

Two listings can show the same revenue and the same profit line and still be priced two million dollars apart, because one is quoting seller's discretionary earnings and the other is quoting EBITDA. The difference is mostly the owner's own pay — and whether the buyer intends to do that job.

What each number is measuring

EBITDA is earnings before interest, taxes, depreciation, and amortization: the operating profit of the business as a standalone entity, assuming someone is paid a market wage to run it. SDE is EBITDA plus one full-time owner's compensation and personal benefits, assuming the buyer will work in the business themselves.

  • SDE ≈ net profit + interest + taxes + depreciation + amortization + one owner's salary and benefits + non-recurring or personal expenses.
  • EBITDA ≈ net profit + interest + taxes + depreciation + amortization, with a market-rate manager's salary left as a real cost.
  • The gap between the two is roughly what it would cost to replace the owner.

Which one buyers use, and when

Owner-operated businesses are almost always quoted on SDE. Once a business is large enough to carry a full management team, buyers switch to EBITDA because the owner is no longer the operating engine. The crossover in practice sits somewhere around one to two million dollars of earnings, though it is a judgment call rather than a rule.

  • Main-street deals, brokered listings, and SBA-financed acquisitions: expect SDE.
  • Private-equity and strategic buyers: expect EBITDA, usually adjusted EBITDA.
  • If a seller quotes SDE on a business with a paid general manager, the owner's pay may be double-counted — check who actually runs it day to day.

Add-backs are where deals get argued

Both numbers depend on add-backs: expenses put back into earnings because they are personal, one-off, or specific to the current owner. Reasonable add-backs are documentable. Everything else is a negotiation.

  • Usually accepted: the owner's salary and payroll taxes (SDE only), personal vehicles and travel, one-time legal fees, above-market owner rent.
  • Usually challenged: 'growth investments' with no receipts, recurring software called one-time, family members on payroll who still need replacing.
  • Ask for the add-back schedule line by line and tie each one to a tax return or bank statement before you accept it.

Multiples are not interchangeable

Because SDE is the larger number, it carries the smaller multiple. Applying an EBITDA multiple to an SDE figure is one of the most expensive arithmetic mistakes in small-business acquisition.

  • Small owner-operated businesses commonly trade in a low single-digit range on SDE.
  • Larger, management-run businesses command higher multiples on EBITDA because the buyer is buying a system, not a job.
  • Always ask: multiple of what, for what period, and on whose adjusted numbers?

Turning the number into a price you can finance

Neither figure is cash flow. Subtract the salary you actually need, the debt service on the acquisition loan, and real maintenance capital spending before deciding the deal works.

  • Model SDE minus your living wage minus annual loan payments minus replacement capital expenditure.
  • If that result is near zero, you have bought a job with debt attached.
  • Stress-test at a ten to twenty percent revenue decline in year one; acquisitions rarely go up first.

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Educational guidance, not personal advice. Outputs are illustrative, may contain errors, and should be independently verified before material decisions.

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