Both SDE and EBITDA measure a business's true earning power — but they're used for different sizes of business, and mixing them up can distort your valuation. Here's the difference and when each applies.
SDE (seller's discretionary earnings) is the total financial benefit to a single owner-operator: net profit plus the owner's salary, benefits and personal add-backs. It answers 'what does this business put in the owner's pocket?'
EBITDA (earnings before interest, tax, depreciation and amortisation) measures operating profitability independent of any one owner — it assumes the owner is a paid, replaceable manager.
Smaller, owner-run businesses (broadly under about $1M in earnings) are usually valued on SDE, because the owner's role and income are central to the business.
Larger, professionally managed businesses are valued on EBITDA, because they run on a management team rather than a single owner.
SDE multiples are typically lower (often ~1.5–3×) and EBITDA multiples higher (often ~4–9× in the lower middle market) — because they're measuring different earnings bases. Comparing an SDE multiple to an EBITDA multiple directly is an apples-to-oranges mistake that can badly misprice a business.
SDE is the total benefit to a single owner-operator (profit plus owner salary and add-backs); EBITDA is operating profit assuming the owner is a replaceable, paid manager. Smaller businesses use SDE, larger ones use EBITDA.
Use SDE for a smaller, owner-run business and EBITDA for a larger, professionally managed one. The multiples differ, so make sure you're comparing like with like.
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