SDE vs EBITDA: How Buyers Actually Measure What Your Business Earns

When an owner asks “what’s my business worth?”, the honest answer starts with another question: what does it actually earn? Not revenue, not what’s on your tax return, the normalized earnings a new owner would take home. Buyers run one of two numbers, SDE or EBITDA, and which one applies to you (and how cleanly you can prove it) does more to set your price than almost anything else. Here’s how it really works.

Buyers don’t value revenue, they value earnings

Two businesses with identical revenue can be worth wildly different amounts, because what matters is what’s left after costs, and how reliable that profit is. Small and lower-middle-market businesses sell on a multiple of normalized earnings, so the entire game is (1) establishing the real earnings number and (2) the multiple a buyer will pay for it.

SDE: the number for owner-operated businesses

SDE, Seller’s Discretionary Earnings, is used for smaller, owner-run businesses. It’s your profit plus the owner’s salary and personal add-backs: the total economic benefit one working owner takes home. It exists because in an owner-operated business, the line between “the business’s profit” and “the owner’s pay” is blurry, and a buyer wants to see the whole benefit one person currently receives.

EBITDA: the number as you scale

EBITDA, Earnings Before Interest, Taxes, Depreciation, and Amortization, is used as a business grows past a single owner and runs on a management team. It strips out owner-specific and financing items to measure the business’s earnings on its own. Larger buyers think in EBITDA because they’re buying a company that runs without any one person, including you.

Which one applies to you

Roughly:

• Owner-operated, you’re central to the day-to-day → buyers use SDE.
• Run by a management team, you could step out tomorrow → buyers use EBITDA.
• In between → the buyer’s view of how dependent the business is on you decides it.
• The bigger and more transferable the business, the more the conversation shifts to EBITDA.

Add-backs: the part that’s won or lost

Normalizing earnings means adding back genuinely personal or one-time costs so the number reflects what the business truly earns. This is where value is made, and trust is lost:

• Legitimate add-backs: above-market owner salary, personal vehicles or travel run through the business, one-time legal or moving costs.
• Each one should be obvious and provable, the best add-backs need no argument.
• Aggressive, vague, or undocumented add-backs do the opposite of what you hope: they make a buyer distrust your entire P&L.
• Owners who get the highest multiples have few, clean, defensible add-backs.

Why your tax return understates your value

You spend years minimizing taxable profit, which is smart for taxes and terrible for a sale, because the profit on your return is rarely the profit a buyer values. Normalizing reverses that for the buyer’s eyes: it shows the real earning power underneath the tax-optimized number. The gap between the two is often a large part of your sale price.

From earnings to price: the multiple

Your value is roughly normalized earnings × a multiple, and the multiple is the market’s judgment of risk and transferability. Recurring revenue, low customer concentration, and a business that runs without you push the multiple up; dependence on you and lumpy revenue push it down. Two levers, one number, and most of your control is on the earnings side.