Small business
SDE or EBITDA? Choosing the right earnings measure for your business
The earnings figure behind a valuation matters as much as the multiple applied to it. Here's how to tell which one fits.
By [Founder name], Ph.D. 4 min read
Most small business valuations come down to a measure of earnings multiplied by a market-based multiple. But which earnings? The two most common are seller's discretionary earnings (SDE) and EBITDA.
Seller's discretionary earnings
SDE starts with pre-tax profit and adds back one owner's salary and benefits, interest, depreciation, amortization and discretionary or one-time expenses. It represents the total cash benefit available to a single owner-operator. It's typically used for smaller, owner-run businesses.
EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) assumes the business pays market-rate management. It's the standard for larger companies where the owner could be replaced by a hired manager.
Why it matters
Multiples for SDE and EBITDA are not interchangeable. Applying an EBITDA multiple to SDE (or the other way round) is one of the most common errors in informal valuations, and can overstate or understate value significantly.
Our approach
We use the measure that buyers of businesses like yours actually rely on, document every adjustment, and pair it with multiples drawn from comparable transactions on the same basis.