SDE vs EBITDA: Which Number Matters for Your Deal?

Buyer calls me last week. Found a plumbing company listed at $2.5M.

"Broker says it does $600K in SDE," he tells me.

"Great. What's EBITDA?"

Silence.

"Aren't those the same thing?"

They're not. And the gap between them was $140K. At a 4x multiple, that's $560,000 on the purchase price. He was about to offer based on the wrong number.

What SDE is

Seller Discretionary Earnings is the total financial benefit the business provides to one full-time owner-operator. Start with net income. Add back:

- Owner's salary and payroll taxes

- Owner's personal expenses run through the business (car, phone, health insurance, travel)

- Interest and depreciation

- One-time or non-recurring expenses

SDE answers one question: "If I buy this and run it myself, how much cash goes in my pocket?"

The plumbing company. $180K net income. Owner pays himself $150K. Runs $20K in personal expenses through the business. Had a $30K one-time truck purchase. SDE = $180K + $150K + $20K + $30K = $380K.

What EBITDA is

EBITDA measures the operating profit of the business independent of any single owner. Add back interest, taxes, depreciation, and amortization.

It does NOT add back the owner's salary. EBITDA assumes someone has to be paid to run the business.

Same plumbing company. $180K net income + $15K interest + $50K taxes + $25K depreciation = $270K EBITDA. The owner's $150K salary stays as an operating expense.

The gap: $110K

SDE is $380K. EBITDA is $270K.

The $110K difference is the owner's compensation. At a 4x multiple, that's $440K on the purchase price.

Apply an EBITDA multiple to an SDE number and you overpay. Apply an SDE multiple to EBITDA and the deal looks worse than it is.

SDE — EBITDA

Includes owner salary as earnings — Yes — No

Assumes owner-operator — Yes — No

Common multiples — 2x - 4x — 3x - 6x

Used for — Businesses under $5M — Businesses over $5M

Who uses it — Business brokers, SBA deals — PE firms, investment banks

When to use SDE

You're buying a business under $5M and plan to run it yourself.

The business has one owner who handles daily operations.

The broker provided SDE. Standard for main street deals.

You're getting an SBA loan. Many lenders underwrite on SDE for smaller deals.

The SDE multiple accounts for the fact that you're buying a job AND a business. The earnings include your salary because you're replacing the seller.

When to use EBITDA

Business is over $5M or has professional management in place.

You're hiring someone to run it. If you need a $150K GM, that cost reduces earnings.

Multiple owners whose combined compensation would inflate SDE.

You're working with PE or institutional capital. They speak EBITDA.

The trap: mixing up multiples

A broker lists a company at "4x SDE." A buyer hears "4x" and compares it to the 4x EBITDA deals he's seen elsewhere. Those are different valuations.

4x SDE on the plumbing company: 4 x $380K = $1.52M.

4x EBITDA on the same company: 4 x $270K = $1.08M.

Same business. Same year. $440K difference. The buyer who doesn't know which metric he's looking at is the buyer who overpays.

What the QoE does

A Quality of Earnings report doesn't pick SDE or EBITDA. It calculates normalized earnings. The recurring, sustainable cash flow after removing one-time items, personal expenses, and accounting noise.

The QoE gives you:

Adjusted EBITDA. What the business earns as a standalone operation.

A clear bridge from reported earnings to adjusted earnings. Every add-back and adjustment with supporting evidence.

The basis for the working capital peg. How much cash the business needs to operate day-to-day.

Whether you or your broker started with SDE, the QoE translates it into the number your lender, attorney, and equity partners need.

Before you make an offer

Ask the broker which metric they're using. If they say "earnings" without specifying SDE or EBITDA, pin them down. The number is meaningless without the label.

Don't compare multiples across metrics. A 3x SDE deal and a 5x EBITDA deal might be priced the same. Compare apples to apples.

Get a QoE. The seller's SDE calculation is the seller's opinion. A QoE is an independent analysis. That's the difference between taking someone's word for it and verifying it.

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*Bedrock delivers Quality of Earnings reports for business buyers, search funds, and SBA borrowers. Flat-fee pricing, 2-4 week turnaround, and a CPA with hundreds of engagements leading every project. Book a free consultation and we'll tell you what your deal needs.*