When you enter the world of M&A, you will hear two acronyms constantly: EBITDA vs SDE. Knowing the difference—and knowing which one applies to your business—determines how big your check will be at the closing table.
Many business owners undervalue their own companies because they look at the wrong number on their tax returns.
What is SDE (Seller’s Discretionary Earnings)?
SDE is primarily used for Small to Mid-sized businesses (often called “Main Street” deals).
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The Formula: Net Profit + Interest + Taxes + Depreciation + Owner’s Salary & Benefits.
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Why it matters: It assumes the new owner will replace you and take your salary as part of their profit. For most businesses under $5M in revenue, SDE is the gold standard.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
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The Usage: It is used for larger, lower-middle market companies where a management team is in place.
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The Difference: In EBITDA, the owner’s salary is usually not added back fully, because the buyer assumes they will need to pay a manager to run the company.
Why getting EBITDA vs SDE wrong costs you money
If you have a business that should be valued on SDE, but you let a buyer value it on EBITDA, you could lose hundreds of thousands of dollars in the final price.
You can check standard accounting definitions on sites like [Investopedia – External Link], but applying them to a sale requires an expert. If you use the wrong formula, you are leaving money on the table.