SDE vs. EBITDA: Which One Should You Use?

When it comes to valuing a business, the two most common profitability metrics are SDE and EBITDA. While they both measure earnings, they serve different purposes and are used for different types of businesses.

What is SDE?

Seller's Discretionary Earnings (SDE) is the total financial benefit a single owner-operator receives from the business. It includes:

• Net Profit
• Owner's Salary
• Depreciation and Amortization
• Interest Expense
• Non-related or one-time business expenses

SDE is the standard metric for small businesses, typically those with less than $1 million in annual earnings.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's overall financial performance and is used as an alternative to simple net income.

EBITDA is used for larger companies where the owner is often not the primary operator, and the business is run by a management team.

The Key Difference: The Owner's Role

The primary difference between the two is how the owner's compensation is handled.

• In SDE, the owner's salary is added back to the profit.
• In EBITDA, a fair market salary for a replacement manager is deducted from the profit.

Which One is Right for You?

• Use SDE if: Your business is owner-operated and has less than $1M in annual profit.
• Use EBITDA if: Your business has a management team in place and generates more than $1M in annual profit.

Conclusion

Understanding which metric to use is the first step in getting an accurate valuation. Most buyers will look at both, but the size and structure of your business will ultimately determine which one takes center stage.