SDE vs. EBITDA: The Two Letters That Change Your Sale Price

Two businesses each "make $500K a year." One owner means SDE, the other means EBITDA, and at sale time, that difference changes both the multiple and the buyer pool.

SDE: the owner-operator's number

Seller's discretionary earnings starts with profit and adds back everything that benefits you personally: your salary, your benefits, discretionary spending run through the company. It answers an individual buyer's question: "how much cash does this business generate for the person running it?"

EBITDA: the investor's number

EBITDA assumes management is a cost, not a benefit, a professional manager's salary stays in the expenses. It answers an investor's question: "what does this business earn as an asset, independent of who operates it?" Larger buyers and private-equity groups think in EBITDA.

Why the distinction moves your price

The same business can show a meaningfully higher SDE than EBITDA, because SDE adds your compensation back. Owners who quote their SDE to an EBITDA buyer, or vice versa, talk past the buyer and lose credibility in diligence. Knowing which number your likely buyer uses tells you which levers to work before going to market.

The practical takeaway

Smaller, owner-run businesses are usually discussed in SDE; once a business has real management infrastructure, EBITDA takes over, and EBITDA-basis buyers often pay higher multiples for the reduced risk. Building management depth literally changes which pricing system your business is judged by.

This article is provided for educational purposes only and is not investment, legal, or tax advice, nor an offer of advisory services. Every business and situation is different, consult your financial, legal, and tax professionals about your specific circumstances. Pacific Point Wealth Management, LLC is a registered investment adviser.

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