EBITDA vs SDE Explained
EBITDA and SDE are the two primary profit metrics used to value small-to-medium enterprises. Understand how they are calculated, how they differ, and when to apply them.
Quick Comparison
| Metric | Definition | Target Business Size |
|---|---|---|
| SDE (Seller Discretionary Earnings) | Net profit + owner salary + personal benefits + non-recurring expenses | Under $1 Million in enterprise value (owner-operated) |
| EBITDA | Earnings Before Interest, Taxes, Depreciation, and Amortization | Over $1 Million in value (management-run) |
1. SDE: Owner-Operator Valuation
SDE calculates the total financial benefit available to a single full-time owner-operator. It adds back the owner's compensation, personal vehicle expenses, health insurance, and one-time capital expenditures to the bottom-line net income.
2. EBITDA: Corporate Valuation
EBITDA measures a business's operational profitability independent of its capital structure, tax environment, or non-cash accounting policies. It is used when a business is run by a management team without daily owner involvement.
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Frequently Asked Questions
Why do buyers use SDE instead of net profit?
Net profits on tax returns are minimized for tax purposes. SDE reveals the true cash flow generated by the business for an active owner.
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