Two numbers, two audiences
SDE — seller's discretionary earnings — measures what a single owner-operator takes out of a business in total: profit plus the owner's compensation and personal benefits, plus non-cash and one-off items. EBITDA measures profit before interest, tax, depreciation and amortisation, with a market-rate manager's salary left as a real cost. SDE answers 'what does this job-plus-business pay its owner?' EBITDA answers 'what does this business earn as an investment run by hired management?'
- SDE includes one owner's salary and benefits; EBITDA does not.
- Small owner-operated businesses are usually quoted on SDE; larger ones on EBITDA.
- The same business can be quoted both ways, and the two numbers will differ substantially.
Add-backs: the part to read slowly
An add-back restores an expense that a new owner will not have. Some are obviously fair — the seller's personal vehicle, a one-off legal settlement, depreciation on equipment already owned. Others are optimistic or false — marketing that produced the revenue, deferred maintenance, an owner's family member doing real work for below-market pay. Each questionable add-back inflates earnings and, multiplied by the price multiple, inflates the price several times over.
- Ask for the add-back schedule in writing, line by line, with evidence.
- Beware add-backs for costs the business will still incur under you.
- If the owner's role must be replaced with a hired manager, that salary is a cost, not an add-back.
Multiples are a summary, not a valuation
A multiple compresses judgement about risk, growth, industry and durability into one number. Higher multiples generally reflect recurring revenue, diversified customers, transferable operations and provable records; lower multiples reflect owner dependence, concentration, thin records or a declining market. Comparing multiples is only meaningful when both sides use the same earnings definition and the earnings themselves have been verified.
- Confirm which earnings definition a quoted multiple applies to before comparing deals.
- Adjust for what the business needs in ongoing capital spending; equipment does not last for free.
- A price that only works at the highest defensible multiple leaves you no room for surprises.
Sanity checks a buyer can run
Rebuild the earnings yourself from tax returns and bank statements, then subtract a realistic salary for whoever will do the owner's work, plus expected capital spending and the new loan payment. What is left is the return you actually buy. If that number is thin, the deal depends on growth you have not yet proven you can deliver.
- Reconcile reported revenue to bank deposits across several months.
- Deduct a market-rate salary for the owner's role to see the investment return.
- Test the price against what a lender will finance on verified earnings.