Guide
SDE or EBITDA: which earnings figure is yours
Updated
This is the single most consequential technical choice in a small business valuation, and it is made before any multiple is chosen. Pick the wrong measure and the answer is wrong regardless of how carefully everything downstream is done.
What each one is
Seller's discretionary earnings is net profit plus the owner's salary and benefits, plus interest, tax, depreciation and amortisation, plus genuinely one-off and personal items. It is the total financial benefit available to one owner-operator.
EBITDA is earnings before interest, tax, depreciation and amortisation, after paying market compensation for every role, including the owner's. It is what the business earns independent of who owns it.
Which one applies
The test is what the buyer will do. A buyer who will take the owner's job values SDE, because they will not be paying that salary to anybody. A buyer who will keep a management team values EBITDA, because that salary is a cost they will continue to bear.
That is why the question in the tool above is about who runs the business rather than about revenue. Size correlates with the answer, but it does not decide it: a large business still run entirely by its owner sits closer to SDE than its revenue suggests.
The mismatch that inflates a valuation
Applying a multiple drawn from EBITDA-based transactions to an SDE figure. SDE is the larger number, sometimes much larger, so the result overstates the value substantially and looks entirely plausible.
The reverse mismatch, an SDE multiple applied to EBITDA, understates it and tends to be caught, because the seller objects. The overstatement survives longer, because nobody in the room wants to challenge it, and it surfaces in diligence when the buyer recomputes the earnings on their own basis.
Add-backs, and what a buyer will accept
An add-back is only worth what it can be evidenced to. A personal vehicle with an invoice trail and a clear business-versus-personal split survives diligence. Miscellaneous expenses described as personal do not.
Two categories are argued about every time. Owner compensation above market, which is a genuine add-back to the extent it exceeds what the role would cost. And expenses that were genuinely one-off, where the test is whether the same category of thing happens every few years: a legal dispute that recurs is a cost of doing business, however individually exceptional each one felt.