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If you are thinking about selling your business, you have likely encountered two acronyms that come up in nearly every valuation conversation: SDE and EBITDA. Both are measures of a business's earning power, but they serve different purposes, apply to different types of businesses, and can produce very different numbers from the same financial statements.
Understanding which metric buyers will apply to your business, and how to calculate it correctly, is one of the most important steps in preparing for a successful sale. This guide breaks down both metrics in plain language, explains when each one is used, and highlights the common mistakes that can cost sellers significant value.
SDE represents the total financial benefit a single owner-operator derives from the business. It starts with net income and adds back the owner's salary, benefits, and personal expenses, along with interest, taxes, depreciation, amortization, and any non-recurring or discretionary expenses.
The logic behind SDE is straightforward: if a new owner steps into the business and replaces the current owner, SDE represents the total cash they could expect to take home before making any financing or reinvestment decisions.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a business's operating profitability independent of its capital structure, tax situation, and accounting decisions around depreciation. Unlike SDE, EBITDA does not add back owner compensation. It assumes the business will be run by a professional management team, and that management salaries are a real, ongoing operating expense.
Owner compensation is normalized to market rate rather than fully added back. If the owner pays themselves well above what a qualified replacement manager would cost, the difference becomes an adjustment, not the full salary.
Both metrics measure earning power, but the assumptions behind them are fundamentally different. The table below shows where they diverge.
The metric that applies to your business depends primarily on two factors: the size of your business and how it is managed.
An important note. These are general guidelines, not hard rules. Some businesses in the transition zone between SDE and EBITDA may be valued using both metrics depending on the buyer. Your broker or advisor can help determine which framing positions your business most effectively.
The metric used to value your business directly affects the buyer pool, the types of offers you receive, and the deal structures available to you. Presenting your business using the wrong metric, or calculating either metric incorrectly, can lead to misaligned expectations, extended marketing periods, or deals that fall apart during due diligence.
Understanding which metric applies to your business and how to maximize it is a conversation best had with an experienced advisor. The difference between a well-framed, properly calculated earnings figure and a loosely presented one can materially affect the buyer interest you generate and the offers you receive.
Our team helps Wisconsin business owners determine the appropriate metric for their situation, identify legitimate and defensible adjustments, and position their business for the strongest possible outcome. We offer confidential, no-obligation valuation consultations.
Consultation includes: Preliminary earnings analysis, metric determination (SDE vs. EBITDA), identification of potential adjustments, and guidance on preparation priorities.
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