SDE vs EBITDA: Which Number Actually Sells Your Business

SDE (Seller's Discretionary Earnings) adds one full owner's compensation back into cash flow. It answers: "How much economic benefit does the working owner take out of this business each year?" It's the standard metric for owner-operated businesses - typically under $1M–$2M in earnings.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) leaves in a market-rate salary for a replacement manager. It answers: "How much cash does this business generate for an owner who isn't working in it?" It's the standard metric for lower-middle-market and up - typically above $1M–$2M in earnings.

Both start from net income and add back:

• Interest expense
• Taxes
• Depreciation and amortization
• Documented non-recurring or discretionary expenses

The difference is owner compensation. SDE adds back the working owner's full W-2, benefits, payroll taxes, and any personal expenses run through the business. EBITDA adds back only the portion of owner comp above a market-rate salary for a hired replacement - the "replacement cost" adjustment.

For a single-owner business paying itself $250K a year against a $120K market salary for the same role:

• SDE add-back on owner comp: $250K (full amount)
• EBITDA add-back on owner comp: $130K ($250K minus $120K market)

That $120K delta flows straight into the earnings number the multiplier is applied to.

SDE multiples for Main Street businesses typically run 2.0x–4.0x depending on size, industry, growth, and transferability. EBITDA multiples for lower-middle-market businesses typically run 4.0x–7.0x for the same reasons.

The two aren't interchangeable. Applying an EBITDA multiple to an SDE number (or vice versa) is the single most common valuation mistake we see - usually by a wide margin. A $600K SDE business at 3x SDE is a $1.8M business; the same $600K, re-cast to $480K EBITDA after a replacement salary, at a 5x EBITDA multiple, is $2.4M. Different metric, different multiple, different price - and the buyer's lender will insist on the metric appropriate to the deal size.

SBA 7(a) underwriting on Main Street deals uses SDE almost universally. Conventional acquisition financing and lower-middle- market senior debt use EBITDA. In both cases, the number that drives the debt service coverage calculation is the adjusted figure - after the lender strips out any add-backs it doesn't accept.

That stripping is where sellers lose the most value. An asking price built on $700K of SDE that the lender re-underwrites to $580K forces either a price cut, a larger seller note on standby, or a broken deal.

• Know which metric applies to your size and buyer pool before you set an asking price.
• Build both an SDE schedule and an EBITDA bridge (subtract a defensible replacement salary from SDE). You'll be asked for both.
• Document every add-back with source paperwork. Undocumented add-backs get removed in underwriting.
• Stress-test the asking price against DSCR at a realistic buyer's debt load. If it doesn't service, the price won't hold.