Using the wrong earnings measure is the most common valuation error in owner-operated businesses — and it usually overstates value by a wide margin.
What each measure means
EBITDA strips out financing and accounting choices to show operating earnings: net profit plus interest, tax, depreciation and amortisation. It assumes the business already pays a full market wage to whoever runs it.
SDE goes one step further and adds back one working owner's total compensation and discretionary spend. It answers a different question: how much cash is available to a single owner-operator who buys the business and works in it.
The rule of thumb
- Owner-operated, typically under about $1m of earnings, buyer will work in the business — value on SDE
- Management team in place, owner is a passive or strategic figure — value on EBITDA
- Larger businesses, private equity or trade buyers, debt funding involved — always EBITDA
Why the multiples differ
SDE multiples are lower than EBITDA multiples on the same business because SDE is the larger number. A main-street business might sell for 2.0–3.5x SDE while a comparable business with management sells at 4–6x EBITDA. Applying an EBITDA multiple to an SDE figure inflates value by roughly the size of the owner's package — often several hundred thousand dollars.
If you add back the owner's salary, you cannot also use a multiple derived from businesses that pay one.
Worked example
A services business reports $180,000 net profit. The owner draws $120,000 but a replacement manager would cost $95,000. Interest is $15,000 and depreciation is $20,000, with $12,000 of genuine maintenance capex.
- SDE = 180,000 + 15,000 + 20,000 + 120,000 = $335,000
- EBITDA = SDE less the market manager wage of 95,000 = $240,000
- At 2.8x SDE the business is worth about $938,000
- At 4.0x EBITDA it is worth about $960,000 — a sensible cross-check
When the two approaches land close together, the multiples you chose are internally consistent. A large gap means one of them is wrong.
Add-backs buyers will accept
- Genuinely one-off legal or relocation costs, with evidence
- Personal vehicles, travel and subscriptions the business will stop paying
- Above-market related-party rent, adjusted to a market lease
- Family members on the payroll who do not work in the business
Add-backs buyers will reject
- Marketing spend the business needs to maintain revenue
- Repairs that recur every year and are really maintenance capex
- 'Lost' revenue the owner says they could have earned
- Anything without a general-ledger trail