SDE vs. EBITDA: Which Number Is Your Business Worth?

Smaller businesses are usually priced on SDE, larger ones on EBITDA after a market salary for the owner's job. Every add-back has to be proven, and that surprises most owners.

Not tax or legal advice. This article is general information based on my own experience selling a business. Every business and deal is different. Talk with your own CPA, attorney and financial advisor before acting on anything here.

The short answer

SDE (seller's discretionary earnings) is your profit before interest, taxes, depreciation and amortization, plus one owner's salary, benefits and personal expenses that ran through the business, adjusted for one-time costs. Smaller businesses are usually priced on SDE. EBITDA is profit before interest, taxes, depreciation and amortization, and buyers calculate it after paying someone a fair market salary to do your job. Larger buyers and private equity usually price on EBITDA. The difference between the two can change your price a lot.

SDE: what one owner-operator takes home

SDE answers one question: what would a single owner-operator take home running this business? It adds one owner's salary, benefits and personal costs back to profit. It does not add back distributions you took from after-tax profit, which would count the same money twice. Buyers who plan to run the business themselves often think this way.

EBITDA: what's left after paying someone to do your job

A larger buyer assumes someone has to do what you do after you leave, and that person won't work for free. So they subtract a market-rate salary for your role. If you pay yourself less than it would cost to replace you, the buyer adjusts for that and your EBITDA goes down. That adjustment is called normalizing your salary.

Add-backs, and the surprise in proving them

Add-backs are one-time or personal costs added back to profit because they won't continue after the sale: a one-time project, a settled dispute, a family member on payroll who won't stay on.

Here's what surprised me in our quality of earnings review: every add-back had to be proven. You have to show the expense was really personal or really one-time, and not something the business needs to run. That's the opposite of what you do for the IRS, where you show an expense is a real business cost. Same receipts, opposite argument. If your records were only built for the IRS, that can be hard to prove, and an add-back you can't prove doesn't count.

What to do

Know both numbers for your business.
Keep a running list of add-backs as they happen, with the paperwork, not years later from memory.
Find out what it would really cost to replace you. The more your business depends on you, the more that number matters.

One thing to try this week

Ask your CPA two questions: What's my SDE? And what's my EBITDA after paying a market salary for my job?

SDE or EBITDA: which number is your business worth?