EBITDA vs SDE, what’s the difference?

The Main Difference: The "Owner's Labor"

The fundamental difference between the two metrics comes down to how the owner’s day-to-day work is treated financially:

SDE Includes the Labor of 1 Working Owner

SDE assumes that the buyer is going to step in and physically run the business themselves as their full-time job. Therefore, the owner's salary is added back into the earnings because that money goes directly into the buyer's pocket as compensation for their daily labor.

EBITDA is Used for Absentee / Investment Businesses

EBITDA assumes the business is run by an absentee owner or managed by an executive team, rather than a hands-on owner.

  • If a working owner wants to show their business's value via EBITDA, they must subtract a Market-Rate Replacement Salary to pay a general manager to handle those daily operations.

  • Because a manager's salary is an ongoing operational expense, EBITDA is naturally lower than SDE for the exact same business.

In Short: SDE tells a hands-on buyer how much money they will make by working the business. EBITDA tells an investor how much money the business makes purely as a hands-off asset after paying a team to run it.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

  • What it is: A measure of a company's core operational profitability, stripping away the effects of financing decisions (interest), accounting choices (depreciation/amortization), and tax jurisdictions.

  • The Focus: It shows how profitable the business enterprise itself is,assuming an absentee owner or an institutional management team is running it.

SDE (Seller’s Discretionary Earnings)

  • What it is: SDE starts with EBITDA but adds back the owner's salary and benefits (like a personal vehicle, health insurance, or travel) that are run through the business.

  • The Focus: It shows the total financial benefit a single owner-operator will take home by buying and working in the business.

Why EBITDA is Used for Larger Businesses ($5M+)

As a business grows past the $5 million valuation mark, it transitions from a "job owned by the founder" to a self-sustaining institutional corporate entity. EBITDA is preferred here for several key reasons:

  • Absentee Ownership: Buyers of larger companies (like Private Equity firms or strategic corporate buyers) are not looking to physically replace the owner and work the counter. They are buying the company as an investment. EBITDA reflects the company's profit after paying a professional management team to run it.

  • Standardized Comparison: Investors need to compare "Company A" against "Company B" purely on operational efficiency. Since larger companies have complex capital structures, EBITDA levels the playing field by removing debt structures and tax variances.

  • Scale of Executive Pay: In a $15 million company, a CEO's salary is a market-rate operational expense, not just "discretionary cash" the owner pockets. Removing it would distort the true cost of running the business.

Why SDE is Used for "Owner Operated" Small Businesses?

For main-street, small businesses, the owner and the business are essentially one and the same. SDE is the gold standard here because:

  • Buying a Job + an Asset: The buyer of a mom-and-pop shop usually plans to step in and run the daily operations themselves. They want to know exactly how much cash will enter their personal bank account at the end of the year to support their lifestyle.

  • Distorted Owner Compensation: Small business owners often pay themselves a combination of salary, dividends, and personal perks to minimize taxes. If you used EBITDA, a business might look unprofitable simply because the owner took a very high salary. SDE adds that back to show the true "pool of cash" available.

The Core Difference:SDE answers the question, "How much money can I make if I operate this business myself? "EBITDA answers the question, "How much return will this business generate on my capital investment if I hire someone else to run it?"

How does EBITDA vs SDE and the Type of Buyer change Valuations?

Below is an article on how and why different types of Buyers place different values on acquisitions.

Which Metric do Buyers use when assessing the Purchase of a Business? In this example, we will use a Medical Clinic in which the Owner Doctor is personally seeing most of the patients.

The answer to that question is that it depends on the size of the Business and the buyer. Individual Buyers are look at SDE while Private Equity Groups, Family Offices, Larger Groups seeking Strategic Acquisitions are looking for EBITDA.

1. SDE (Seller’s Discretionary Earnings)

  • Who uses it: Individual doctors looking to buy a practice to work in and own (Owner-Operators).

  • What it measures: The total financial benefit a full-time working owner derives from the business.

  • Calculation: It starts with EBITDA and adds back the following:

    • The owner's salary.

    • Discretionary expenses (e.g., unnecessary travel, company cars, owner retirement plans ect).  

  • Valuation Example: An individual buyer might pay 1 to 2.5 times the SDE.

2. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

  • Who uses it: Large groups, Private Equity, Family Offices or passive investors who will not work in the clinic.

  • What it measures: The profit of the business assuming a "passive" ownership structure.

  • Calculation:

    • It deducts a replacement doctor's salary (e.g., $200k) and General & Administrative (G&A) costs from the earnings.

    • This usually results in a significantly lower number than SDE ($100k EBITDA vs. $350k SDE .

  • Valuation Example: A large group might pay 2 to 4 times of the EBITDA. More depending on the size and the synergies the buyers may have .

Let’s define EBITDA, Earnings before Interest, Taxes, Depreciation, and Amortization. The way to Calculate this is to simply add those items from the financial statements. This method assumes a “Passive” (not working in the business) owner and investor for example.

SDE is the acronym for Sellers Discretionary Earnings, AKA Sellers Discretionary Cash Flow, Adjusted Net and a few other similar sounding names. This Metric includes all of the EBITDA items listed above but also Assumes a Full-Time working owner and includes the normalized, replacement cost for Seller's Salary, (this is Discretionary as different owners can take larger or small salaries vs net profits), Seller’s Discretionary Expenses “add backs”. Examples might be Travel that is not necessary for the business, a company car that is also personal, a retirement plan for the owner of the business just to name a few.

An individual Doctor looking to buy a Medical Practice to work in and own will be looking at SDE to calculate how much they will make taking over the Seller’s duties. An example would be an Internal Medicine Practice with $800k in Gross Revenues and the Full-Time working Doctor owner is making $350k after all the bills are paid. A buyer might pay 1 to 2.5 times (maybe more) of the SDE to purchase that practice.

A Large Group or Hospital looking to buy this same Practice will be a somewhat passive investor and will include a Doctor's Salary of $250k+ in the expenses. They will also add general and administrative cost and where the SDE was $350k in this example, the EBITDA is now around $100k for the same Business. With the owner Doctor leaving, they will also want the seller to “earn out” of the business for the risk that the patients don’t like the new Doctor they place in the Practice. This means that if the Gross Revenues decrease after the sale, the seller receives less money for the business. The large group may pay 2 to 3 times (could be more for a Business that has $1mm+ in EBITDA) the EBITDA but the higher Multiple is on a much smaller Number. 3 Times EBITDA of $100k in this example equals $300k price where 1.5 times SDE of $350k equals a price of $525k.

Keep in mind this is the Same Business, Same Numbers, just a different point of view from different types of buyers. The Bottom Line is that your Business has a different value to different types of buyers.

You need a Broker that can help you find the best buyer to get the best price for your Business when it is time to sell. If you are thinking about selling a business or Medical Practice and are not happy with the offers you have received from large group buyers, call us at (813) 690-0109 for a free confidential consultation about buying or selling your Business or email Vince@EnterpriseBrokers.com