SDE vs EBITDA: which one should I use to value my business?

SDE (seller's discretionary earnings) and EBITDA (earnings before interest, taxes, depreciation, and amortization) are both 'normalized profit,' but they differ in one key way: SDE adds back the full compensation of one working owner (salary, payroll taxes, and discretionary perks), while EBITDA does not. SDE answers 'what would a single owner-operator earn from this business?'; EBITDA answers 'what does this business earn independent of who owns it?'

Which to use depends on size and how the business is run. SDE is the standard for smaller, owner-operated businesses, typically those with under roughly $1M in earnings, where the buyer will replace the owner's day-to-day role. EBITDA is the standard for larger companies with a management team, where the owner is not essential to daily operations. The rough crossover is around $1M-$2M in earnings; above that, most buyers and PE firms speak in EBITDA.

The two are not interchangeable in multiples, so don't mix them. Small businesses trade at about 2x-4x SDE, while larger, professionally managed ones trade at about 4x-8x EBITDA. Applying an EBITDA multiple to an SDE figure (or the reverse) badly distorts the result. The most common mistake is double-counting the owner's salary, so be consistent about which metric you are using and apply the matching multiple.