⬢ Exit guide

SDE vs. EBITDA: Which One Values Your Business?

If you've started researching what your business is worth, you've hit two acronyms — SDE and EBITDA. They're close cousins, and knowing which one applies to you keeps you from mispricing your life's work.

SDE vs. EBITDA: Which One Values Your Business?

When you prepare to exit your business, the first question you will encounter is how to measure your profit. In the world of mergers and acquisitions, "profit" is not a single number. Depending on the size and structure of your company, buyers will look at either Seller's Discretionary Earnings (SDE) or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).

Choosing the wrong metric can lead to an inaccurate valuation. Follow these steps to determine which one applies to your situation.

Step 1: Analyze Your Role in the Business

The primary difference between these two metrics is how they treat the owner's compensation. To decide which to use, look at how your business functions on a daily basis.

If you are an owner-operator—meaning you manage the daily tasks and the business relies heavily on your personal involvement—you should focus on SDE. SDE is designed for smaller, owner-operated businesses. It calculates the total financial benefit the business provides to a single owner by adding the owner's salary back into the profit.

If your business has a professional management team in place and can operate independently of your daily presence, you likely fall into the EBITDA category. EBITDA is used for larger businesses. Unlike SDE, it does not add back a full owner's salary, as it assumes a manager must be paid to run the operations.

Step 2: Calculate the Correct Metric

Once you identify your business type, you can apply the correct formula to find your baseline earnings.

For SDE, you start with your net profit and "add back" expenses that a new owner might not incur, most notably your own salary and benefits. This provides a clear picture of the total cash flow available to a single buyer.

For EBITDA, the focus shifts to operational efficiency. You add back interest, taxes, depreciation, and amortization to the net income. This allows buyers to compare your business's performance against others in the industry regardless of how the company is financed or taxed.

Step 3: Apply the Valuation Multiple

After determining your SDE or EBITDA, the final step is applying a multiple to arrive at a valuation. This is where you can learn more about what is my business worth based on current market trends.

Small owner-operated businesses are almost always valued on SDE. On average, these businesses are valued at roughly 2.7x their SDE. Larger companies using EBITDA typically command different multiples based on their scale and management structure.

Understanding these distinctions ensures you enter negotiations with a credible number. If you are ready to evaluate your specific position, you can start the process of planning your exit.

• Use SDE if you are an owner-operator and the business relies on your daily work.
• Use EBITDA if you have a management team in place and the business is larger in scale.
• Remember that SDE adds back the owner's salary, while EBITDA does not.
• Small owner-operated businesses typically see an average valuation of 2.7x SDE.