You are preparing to sell your business and someone asks: "What are your earnings?" The number you give -- and how you calculate it -- can change your sale price by hundreds of thousands of dollars.
The two most common valuation metrics for private businesses are SDE (seller's discretionary earnings) and EBITDA (earnings before interest, taxes, depreciation, and amortization). They measure different things, attract different buyers, and use different multiples. Choosing the wrong one does not just confuse the conversation -- it can leave real money on the table.
This guide explains both metrics, shows you exactly how each one changes your sale price using the same business, and tells you which one to use based on your revenue and business structure.
The Short Answer
SDE adds back your total compensation to earnings. It answers: "How much does one owner-operator take home from this business?" Use SDE if your business earns under $1M and you are the primary operator.
EBITDA does not add back owner compensation. It answers: "What does this business earn as a standalone operation?" Use EBITDA if your business earns over $1.5M and has (or could have) professional management.
Between $1M and $1.5M, either metric may apply -- it depends on your business structure and your likely buyer.
What Is SDE (Seller's Discretionary Earnings)?
Seller's discretionary earnings represent the total financial benefit a single owner-operator receives from the business. It is the standard valuation metric for small, owner-operated businesses -- typically those with earnings under $1 million.
How to Calculate SDE
Start with your net income and add back everything that is specific to you as the owner, plus non-cash and non-recurring expenses:
Net Income (from your tax return)
+ Owner's salary and benefits
+ Interest expense
+ Taxes (income tax paid by the business)
+ Depreciation and amortization
+ One-time / non-recurring expenses
+ Personal expenses run through the business
+ Above-market rent to yourself (if applicable)
─────────────────────────────────
= SDE (Seller's Discretionary Earnings)
Worked Example: A $2M Revenue Restaurant
| Line Item | Amount |
|---|---|
| Net income | $180,000 |
| Owner's salary + benefits | $150,000 |
| Interest on business loan | $20,000 |
| Income taxes paid by business | $15,000 |
| Depreciation (kitchen equipment) | $35,000 |
| One-time renovation cost | $25,000 |
| Owner's car lease through business | $12,000 |
| Owner's cell phone + meals | $8,000 |
| SDE | $445,000 |
This $445,000 is what a new owner-operator would expect to earn running this restaurant -- before paying themselves a salary and before debt service on any acquisition financing.
What Is EBITDA?
EBITDA -- earnings before interest, taxes, depreciation, and amortization -- measures a business's operational profitability independent of its capital structure, tax situation, and accounting decisions. It is the standard metric for mid-market and larger businesses, and the primary metric private equity firms and strategic acquirers use.
The key difference from SDE: EBITDA does not add back owner compensation. It assumes the business needs a paid manager to operate.
How to Calculate EBITDA
Net Income
+ Interest expense
+ Taxes
+ Depreciation
+ Amortization
─────────────────────────────────
= EBITDA
Many buyers also look at adjusted EBITDA, which further adds back one-time expenses and above-market costs -- but crucially, it never adds back owner compensation.
Worked Example: Same Restaurant
Using the same $2M revenue restaurant:
| Line Item | Amount |
|---|---|
| Net income | $180,000 |
| Interest on business loan | $20,000 |
| Income taxes | $15,000 |
| Depreciation | $35,000 |
| One-time renovation cost | $25,000 |
| Adjusted EBITDA | $275,000 |
Notice the difference: SDE was $445,000. EBITDA is $275,000. The $170,000 gap is the owner's compensation and personal add-backs -- the cost of replacing you with a hired manager.
SDE vs EBITDA: The Key Differences
| SDE | EBITDA | |
|---|---|---|
| Adds back owner compensation? | Yes -- the full amount | No -- assumes a paid manager |
| Typical business size | Under $1M earnings | Over $1.5M earnings |
| Typical multiples | 2x - 4x | 4x - 8x |
| Primary buyer type | Individual buyers, search funds | Private equity, strategic acquirers |
| What it measures | Total benefit to one owner-operator | Standalone operational profitability |
| Best for | Owner-dependent businesses | Businesses with professional management |
| Add-backs | All owner-specific + non-cash + non-recurring | Non-cash + non-recurring only |
Which One Should You Use?
Use SDE If Your Business Earns Under $1M
If your business generates less than $1 million in owner earnings (SDE), the most likely buyer is an individual -- someone buying a job and a business at the same time. They want to know what they will take home.
These buyers think in SDE multiples. They are comparing your business to other small businesses and to the alternative of working a salaried job. Typical SDE multiples for this segment: 2x to 3.5x.
Most businesses sold through business brokers are valued this way.
Use EBITDA If Your Business Earns Over $1.5M
Once your business reaches $1.5 million or more in earnings, you start attracting a different kind of buyer: private equity firms, family offices, and strategic acquirers. These buyers have professional management teams. They are not buying a job -- they are buying cash flow.
These buyers think in EBITDA multiples. They are comparing your business to other portfolio companies and to their target returns. Typical EBITDA multiples for this segment: 4x to 8x, depending on industry, growth, and risk.
The Grey Zone: $1M to $1.5M in Earnings
Businesses earning between $1M and $1.5M can go either way. The deciding factors:
- Can it run without you? If yes, EBITDA is more credible. If no, use SDE.
- Who is your likely buyer? If an individual, use SDE. If PE or strategic, use EBITDA.
- Do you have a management team? If you have a GM or operations manager, EBITDA is appropriate.
Don't fake it
Presenting EBITDA when your business is really an SDE business -- owner-dependent, no management team, you are the rainmaker -- will backfire during due diligence. Buyers will see through it and either renegotiate or walk away. Use the metric that honestly represents your business.
How Each Metric Affects Your Sale Price
This is where the choice between SDE and EBITDA becomes real money. Let's value our same restaurant both ways.
SDE Valuation
SDE: $445,000
Multiple: × 2.5 (typical for a $2M revenue restaurant)
────────────────
Value: $1,112,500
EBITDA Valuation
EBITDA: $275,000
Multiple: × 5.0 (typical EBITDA multiple for restaurants with management)
────────────────
Value: $1,375,000
The same business, valued two different ways: $1,112,500 vs $1,375,000. That is a $262,500 difference -- not from changing anything about the business, but from how you present and structure it.
But here is the catch: the EBITDA valuation only works if the business can credibly operate without the owner. If the owner is the head chef, the relationship manager, and the bookkeeper, no PE firm is paying a 5x EBITDA multiple. They will either walk away or reprice using SDE math.
The real opportunity
If your business is currently in the SDE range but approaching $1M+ in earnings, the most valuable thing you can do before selling is make yourself replaceable. Hire a manager. Document your processes. Run the business for 6-12 months without being involved in daily operations. This shifts your business from SDE multiples to EBITDA multiples -- and that shift alone can add hundreds of thousands to your sale price.
What Buyers Actually Look At
Different buyers use different metrics because they have different goals:
Individual buyers (buying through a business broker, often with an SBA-equivalent loan) look at SDE. They want to know: "Can this business support my family and service the acquisition debt?" They compare SDE to the salary they are leaving behind.
Private equity firms look at EBITDA. They want to know: "What is the cash flow after paying a management team? What is the return on our invested capital?" They compare EBITDA multiples across their deal pipeline and portfolio.
Strategic acquirers (a competitor or company in your industry) look at EBITDA but may pay a premium above market multiples. They are buying synergies -- your customer base, your territory, your capabilities. They can cut costs or grow revenue in ways a financial buyer cannot.
Search funds (entrepreneurs backed by investors to acquire one business) can go either way. They often look at businesses in the $1M-$3M EBITDA range and plan to operate them hands-on initially, so they understand both SDE and EBITDA perspectives.
Questions You Might Have
What is the difference between SDE and EBITDA?
SDE adds back the owner's total compensation to earnings, showing what one owner-operator takes home. EBITDA does not add back owner compensation, measuring operational profit independent of any single owner. SDE is used for owner-operated businesses under ~$1M in earnings; EBITDA is used for larger businesses with professional management.
Which metric gives a higher valuation?
Neither metric inherently gives a higher valuation. SDE produces a higher earnings number (because it includes owner compensation) but uses lower multiples (typically 2-4x). EBITDA produces a lower earnings number but uses higher multiples (typically 4-8x). For businesses in the $1M-$1.5M earnings range, the two approaches often produce similar valuations. Above $1.5M, EBITDA-based valuations tend to be higher because the multiple premium reflects scalability.
What are typical multiples for my industry?
Multiples vary significantly by industry. General ranges for SDE: restaurants 2-3x, professional services 2-3.5x, HVAC and trades 2.5-4x, manufacturing 3-4.5x. For EBITDA: restaurants 3-5x, professional services 4-6x, HVAC and trades 5-7x, manufacturing 5-8x, SaaS 8-12x. These are broad ranges -- your specific multiple depends on growth rate, customer concentration, recurring revenue, and dozens of other factors.
Can I switch from SDE to EBITDA before selling?
Yes, but it requires real operational changes, not just a different spreadsheet. To credibly present EBITDA, you need to hire a manager who can run the business without you, document processes so operations do not depend on the owner, and demonstrate at least 6-12 months of the business performing under professional management. Buyers and their advisors will see through a relabeled SDE presented as EBITDA.
How do I calculate SDE for my business?
Start with your net income from your tax return or financial statements. Add back: owner's salary and benefits, interest expense, taxes, depreciation and amortization, one-time or non-recurring expenses, personal expenses run through the business, and any above-market rent paid to yourself. The total is your SDE -- what a new owner-operator would earn running the business.
Next Step: Find Out What Your Business Is Worth
Whether you use SDE or EBITDA, the next question is always: what multiple applies to your specific business?
Multiples depend on your industry, your growth rate, your customer concentration, your recurring revenue, and a dozen other factors that generic ranges cannot capture. A $500,000 SDE business in HVAC with recurring maintenance contracts might command a 3.5x multiple, while the same SDE in a project-based construction business might only get 2x.
If you are thinking about selling your business in the next few years, understanding where you land on the SDE-to-EBITDA spectrum -- and what multiple your business realistically commands -- is the first step.
The free valuation tool gives you a range based on your revenue, industry, and business characteristics. It takes two minutes and gives you a starting point for the most important financial decision of your career.
And if your business qualifies as a Canadian-controlled private corporation, the lifetime capital gains exemption could save you over $300,000 in taxes on the sale -- but only if you plan ahead.
