EBITDA vs. SDE: Understanding the Numbers That Drive Main Street Business Valuations
EBITDA vs. SDE: Understanding the Numbers That Drive Main Street Business Valuations
If you’re a business owner thinking about selling your company, you’ve probably heard two terms tossed around: EBITDA and SDE. Both are used in business valuations, but they mean very different things—and understanding the distinction is crucial for setting the right asking price and negotiating with buyers.
I'm going to break down what EBITDA and SDE actually measure, why each is important, and how they apply differently to small and mid-sized businesses.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
It’s a financial metric that focuses on a business’s core operating profitability, stripping out variables like financing costs, tax structures, and accounting decisions.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Why Buyers Care About EBITDA
Apples-to-apples comparison: By removing financing and tax variables, buyers can compare businesses across industries more easily.
Scalability: EBITDA is often used for larger companies ($ 3M to 5M+) where the business isn’t dependent on the owner’s daily involvement.
Debt service: Lenders look at EBITDA to evaluate whether a company can support loan payments after an acquisition.
Example:
A Chattanooga manufacturing company generates $500,000 in net profit. Add back $100,000 in depreciation on equipment, $50,000 in interest, and $100,000 in taxes, and EBITDA comes out to $750,000. This adds an additional $250,000 in annual value. This is important because with a multiple of 4 times earnings (4x), this is an additional $1M of value we can place on the business.
What is SDE?
SDE stands for Seller’s Discretionary Earnings. It’s the most common valuation metric for Main Street and smaller businesses (typically those with under $5 million in revenue).
SDE starts with net income and then adds back the total financial benefit the owner takes from the business, including salary, perks, and discretionary expenses.
Why SDE Matters for Small Business Owners
Reflects true owner benefit: It shows the total financial return an owner/operator receives from the business.
Captures lifestyle expenses: Many small business owners run personal perks (car, travel, health insurance) through the business. These are added back to reflect the true profitability.
Valuation standard for Main Street: Most businesses under $1M in earnings are priced and sold based on a multiple of SDE, not EBITDA.
Example:
A local restaurant reports $150,000 in net income. The owner also pays themselves a $100,000 salary, runs $20,000 in personal car expenses through the business, and had a $10,000 one-time legal bill. The SDE is $280,000.
Why This Matters for Main Street and Small Business Owners
When you decide to sell your business, one of the first questions will be: What’s the multiple applied to?
For small, owner-operated businesses: Multiples are almost always applied to SDE. Buyers want to know how much income they can expect if they step into your shoes.
For larger businesses with management teams in place: Multiples are typically applied to EBITDA, since the business is less reliant on the owner and more attractive to financial buyers or private equity.
Business Owner Practical Takeaway
If your business relies heavily on you, expect buyers and brokers to focus on SDE.
If your business runs with a management team and has clean financials, expect valuations to be based on EBITDA.
Knowing which metric applies helps you prepare realistic expectations—and defend your asking price with confidence.
EBITDA and SDE both measure profitability, but they answer different questions:
EBITDA asks: How profitable is this business as a stand-alone operation?
SDE asks: How much money does the owner actually take home?
If you’re preparing to sell, work with an advisor who understands both metrics and can help you present your financials in the most buyer-friendly way. At Riverview Exit Advisors, we help business owners navigate these distinctions, prepare clean financials, and maximize value when it’s time to exit. Book a call today.
