SDE vs EBITDA: Which Metric Values Your Business?

If you've started researching how to sell a business, you've likely encountered both "SDE" and "EBITDA" as the basis for business valuation. They sound similar but are used differently — and using the wrong one can lead to a significantly understated or overstated view of your company's value.

What Is SDE (Seller's Discretionary Earnings)?

SDE is the total pre-tax earnings available to a single owner-operator who works full time in the business. It starts with net income and adds back:

• Owner's salary and benefits (what you pay yourself, above what you'd pay a replacement manager)
• Owner's personal expenses run through the business (vehicle, phone, travel with personal component)
• Depreciation and amortization
• Interest expense
• One-time, non-recurring items (a lawsuit settlement, an unusually large repair, pandemic-related grants)

The resulting number represents "what a new owner-operator would earn by owning and running this business full-time." SDE is typically used for businesses with under $2–3M in annual earnings where a single working owner would replace the outgoing operator.

Typical SDE multiples: 2× – 4× depending on industry, size, and quality.

What Is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)?

EBITDA measures operating profitability independent of financing structure, tax situation, and non-cash charges. It adds back to net income:

• Interest expense
• Income taxes
• Depreciation
• Amortization

For larger businesses valued on EBITDA, the owner's salary is typically normalized to a market-rate replacement manager salary — not added back entirely, as it is in SDE. This reflects the reality that a buyer (often an institutional acquirer or PE firm) will hire professional management rather than run the business themselves.

Typical EBITDA multiples in Virginia's lower middle market: 3× – 8×, varying by sector, recurring revenue quality, and growth trajectory.

The Key Distinction: Owner Compensation Treatment

This is where it matters most. In SDE calculation, the owner's entire compensation is added back — because the buyer (a single owner-operator) is replacing that compensation with themselves. In EBITDA calculation for larger businesses, only the excess above a market-rate salary is added back — because the buyer will need to hire someone to do that work.

A Practical Example

Consider a plumbing company with $8M in revenue where the owner pays himself $400,000 per year and the business generates $600,000 in net income after that salary.

SDE calculation: $600K net income + $400K owner salary + $80K depreciation + $20K personal expenses = $1.1M SDE. At a 3× multiple = $3.3M valuation.

EBITDA calculation: $600K net income + $80K depreciation + $20K interest = $700K EBITDA. But now normalize owner salary: replace $400K with a market-rate GM salary of $120K = add back $280K. Normalized EBITDA = $980K. At a 4× multiple = $3.9M valuation.

In this case, EBITDA-based valuation to a PE buyer produces a higher number. This is often true at larger sizes — which is one reason why businesses above a certain earnings threshold become more attractive to institutional buyers.

Which Applies to Your Business?

As a rough guide: if your normalized owner earnings are below $1.5–2M and you're expecting to sell to an individual operator, SDE is likely the right lens. If your EBITDA is above $2M and you're in a sector with active PE or strategic buyer interest, EBITDA is more appropriate — and typically produces a higher valuation with the right buyers.

In practice, many businesses in the $5M–$15M revenue range sit at the transition point between these two metrics. Getting a proper valuation assessment — rather than applying a single formula — is the only way to get a number that actually holds up in a transaction.