EBITDA and SDE are both "profit" – but different profit, with different multiple ranges and different use cases. Picking the wrong one leads to valuations that are 30–50% off. This guide explains which one applies when, and how to convert between them.
The short version
EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) is the profitability metric for businesses that run with professional management, where the owner isn’t integral to daily operations. Typical users: mid-market businesses above $5M revenue, private-equity-backed companies, and anything a strategic buyer is acquiring.
SDE (Seller’s Discretionary Earnings) is the metric for owner-operated small businesses where the owner is part of daily operations. It adds back full owner compensation (not just the above-market portion). Typical users: businesses under $5M revenue with one or two working owners, businesses sold through brokers rather than M&A advisors.
Get the right one and your valuation is defensible. Get the wrong one and you’re either leaving money on the table or setting unrealistic expectations.
How each is calculated
EBITDA walk
Operating Profit (EBIT) + Depreciation & Amortisation = Reported EBITDA + Above-market owner salary + Personal vehicles / benefits + Family employees above market + Related-party rent above market + One-off non-recurring costs = Normalised EBITDA
Normalised EBITDA adjusts for costs a new owner wouldn’t incur. Critically, it only adjusts the excess owner compensation. If the owner pays themselves $200k but the market rate for the role is $120k, the add-back is $80k, not $200k.
Our EBITDA calculator walks through the full normalisation including which add-backs typically survive buyer due diligence.
SDE walk
Operating Profit (EBIT) + Depreciation & Amortisation = Reported EBITDA + Full owner salary / draw + Owner benefits & pension + Owner vehicle & expenses + Family above-market adjustments + Related-party rent adjustments + One-off non-recurring costs = SDE
The critical difference: SDE adds back all owner compensation, not just the above-market portion. The logic is that a new buyer either runs the business themselves (capturing the owner comp as their own earnings) or hires a replacement at market rate. Either way, the owner’s compensation is a buyer choice, not an operating cost.
Our SDE calculator implements this walk with the add-backs specific to owner-operated businesses.
Why the multiples are different
SDE is a bigger number than EBITDA (it includes full owner comp), so the multiple applied to SDE compresses to keep final valuations consistent. Typical relationships in the same industry:
- Professional services: ~10.5× EBITDA / ~3.0× SDE
- Manufacturing: ~9.5× EBITDA / ~2.8× SDE
- Retail: ~8.0× EBITDA / ~2.4× SDE
- Software / SaaS (small): ~22× EBITDA / ~4.5× SDE
SDE multiples are typically 25–40% lower than EBITDA multiples for the same industry. See our industry multiples database for the complete reference.
Worked example
Consider a professional services business:
- Revenue: $1.5M
- Operating profit: $180k
- D&A: $20k
- Owner salary: $120k
- Owner benefits: $15k
- Above-market portion of owner salary: $40k (market rate for role: $80k)
EBITDA approach:
- Reported EBITDA = $180k + $20k = $200k
- Normalised EBITDA = $200k + $40k above-market + $15k benefits = $255k
- At 10.5× EBITDA multiple: valuation = $2.68M
SDE approach:
- Reported EBITDA = $200k
- SDE = $200k + $120k owner salary + $15k benefits = $335k
- At 3.0× SDE multiple: valuation = $1.01M
The gap isn’t arbitrary – it reflects different buyer assumptions. The SDE-based $1M represents an individual-operator buyer paying to acquire a business that still needs daily owner involvement. The EBITDA-based $2.7M represents a strategic buyer who can run the business with existing management plus their own resources.
For the same business, the realistic sale price typically falls between these – closer to SDE-based for smaller / more owner-dependent businesses, closer to EBITDA-based for those with real professional management.
When to use which
| Situation | EBITDA | SDE |
|---|---|---|
| Revenue under $2M, owner-operated | Rarely | Primary |
| Revenue $2–$5M, owner still integral | Secondary | Primary |
| Revenue $5M+, management team runs day-to-day | Primary | Rarely |
| Selling to another individual operator | Rarely | Primary |
| Selling to a strategic buyer | Primary | Rarely |
| Selling to private equity | Primary | Almost never |
| Insurance sizing / buy-sell valuations | Primary | Primary |
A business near the $5M threshold should calculate both and understand the range. The gap between them is informative – it represents the value of reducing owner dependence over time.
The crossover math
For a well-run business of the right size, the two approaches typically converge. Rough rule: 8× EBITDA ≈ 3× SDE produces similar answers in most industries, for businesses near the threshold.
If your EBITDA-based valuation and SDE-based valuation are dramatically different (more than 50% apart), that’s often a signal the business isn’t cleanly in one camp or the other. Reducing owner dependence over 18–36 months usually narrows the gap.
Where to go from here
Start with the calculator that matches your profile:
- Over $5M revenue with a management team → EBITDA calculator
- Under $5M revenue, owner-operated → SDE calculator
- Want both, plus a 3-method blended valuation → Quick valuation calculator
- Need the full defensible report → Standard or Detailed