Understanding EBITDA & SDE: Key Metrics in Business Valuation

When selling a business, one of the first questions buyers and brokers ask is, "How much is it making?" While revenue is important, it’s not the best indicator of a business’s true earning potential. Instead, buyers look at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or SDE (Seller’s Discretionary Earnings), also known as Owner Benefit, to determine value. Understanding these metrics is essential for both buyers and sellers looking to maximize a business transaction.

What is EBITDA?

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric that measures a company’s profitability before accounting for non-operational expenses. It is commonly used for valuing larger businesses, typically those with more than $1M in annual earnings.

EBITDA Formula: EBITDA = NetProfit + Interest + Taxes + Depreciation + Amortization

Why It Matters:

Helps buyers assess a company’s true operating profitability without financial structuring distortions.
Standardized for comparison across businesses and industries.
Often used by private equity firms and larger buyers for valuation.

However, EBITDA does not account for the owner’s personal expenses that may be run through the business, which is why SDE is often preferred for smaller businesses.

What is SDE (Seller’s Discretionary Earnings) / Owner Benefit?

SDE (or Owner Benefit) is a profitability metric specifically used for valuing small to mid-sized businesses, typically those earning less than $1M per year. It represents the total financial benefit an owner derives from the business, including salary and perks.

SDE Formula: SDE = Net Profit + Owner's Salary + Discretionary Expenses + Depreciation + Interest + Amortization + One time expenses

Why It Matters:

Reflects what the business is truly making for a working owner.
Includes personal expenses and perks that will not necessarily transfer to a new owner.
Gives small business buyers a clearer picture of the actual take-home earnings they can expect.

EBITDA vs. SDE: What’s the Difference?

Factor	EBITA	SDE (Owner Benefit)
Used For	Mid-to-large businesses ($1M+ in earnings)	Small businesses (under $1M earnings)
Includes Owner Salary?	❌ No	✅ Yes
Includes Discretionary Expenses?	❌ No	✅ Yes
Preferred By	Private equity, strategic buyers	Individual buyers, small business investors

The biggest distinction is that SDE includes the owner’s salary and benefits, whereas EBITDA assumes the business is being run by an external management team and excludes personal expenses.

Implications for Business Sellers

If you own a small business, focus on maximizing SDE to make your business more attractive to buyers.
If you operate a mid-sized business, buyers will likely use EBITDA to value it, so reducing unnecessary expenses and increasing profitability can boost valuation.
Accurate financial documentation is key—clean books help justify your valuation and attract serious buyers.

Implications for Business Buyers

For small businesses, look at SDE to understand how much income you can personally take home.
For larger acquisitions, EBITDA provides a clearer picture of profitability under professional management.
Always verify discretionary add-backs when evaluating SDE—some owners may try to inflate it with non-legitimate expenses.

Final Thoughts

Whether you’re buying or selling a business, understanding the difference between EBITDA and SDE is crucial in determining fair value. Sellers should work to maximize these metrics before listing their business, while buyers should carefully analyze them to ensure they’re getting a solid investment.

If you’re considering selling your business or want a professional valuation, reach out today to discuss how we can position your business for the best possible outcome.