SDE vs. EBITDA: What Your Small Business Is Actually Worth
If you are preparing to sell your business, the first number every buyer will ask about is your earnings. But earnings means different things at different sizes, and using the wrong metric can cost you real money at the negotiating table. The two that matter most are SDE and EBITDA.
SDE: the owner-operator number
Seller’s Discretionary Earnings, or SDE, is net profit with the owner’s salary, benefits, and personal expenses added back, plus interest, taxes, depreciation, and amortization. It represents the total financial benefit a single owner-operator takes from the business. SDE is the standard metric for businesses under roughly two to three million dollars in value, where the buyer expects to step into the owner’s role.
EBITDA: the manager-run number
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, does not add back an owner’s salary, because it assumes the business is run by a hired manager. As businesses grow larger and less dependent on the owner, buyers shift from SDE to EBITDA. The same business can be described either way, so make sure you and the buyer are speaking the same language before comparing multiples.
The multiple is a range, not a fact
Small businesses trade for a multiple of SDE or EBITDA, but the multiple is driven by risk, not just size. Clean financials, diversified customers, recurring revenue, and a business that runs without you all push the multiple up. The fastest way to increase your sale price is rarely to grow earnings in the final year. It is to reduce the risks that compress your multiple.