EBITDA vs SDE in Business Acquisitions

What each figure measures

EBITDA

Earnings before interest, tax, depreciation and amortisation is the operating profit of a business before the cost of financing it, the tax on it, and the accounting charges for wearing out its assets. It approximates the cash the operations generate before capital expenditure, so that businesses with different debt, tax positions and asset ages can be compared. In an acquisition it is stated after a market-rate cost for whoever runs the business, because the buyer of a management-run company inherits that cost. See how to calculate EBITDA for the formula worked through step by step.

Seller's discretionary earnings

SDE is EBITDA plus everything the owner takes out of the business: salary, employer contributions, pension, benefits, the car, the personal expenses that run through the company, and any genuinely one-off cost. It is the whole financial benefit available to one owner-operator, and it exists because in a small business the owner's pay is a decision rather than a market cost. A buyer who will do the owner's job is buying that whole stream.

The bridge from net profit to EBITDA to SDE

The two figures are related by a bridge, and every step of it should be visible so that a buyer can see what was added and why.

1. Start from net profit after tax as reported
2. Add back corporation tax and interest to reach operating profit (EBIT)
3. Add back depreciation and amortisation to reach EBITDA
4. Add back the owner's salary, employer contributions, pension and benefits — the full cost of the owner, not only the salary line
5. Add back personal or discretionary expenses run through the business, with evidence for each
6. Add back genuine one-off costs, or deduct one-off gains, to reach SDE

A management-run buyer goes one step further: deduct the market cost of the manager who replaces the owner, including on-costs, to reach the adjusted EBITDA on which an EBITDA multiple can be applied. A one-owner business therefore has three earnings figures — reported EBITDA, SDE and adjusted EBITDA — and a memorandum may quote any of them under the name "adjusted earnings". Always ask which.

Which businesses are priced on which, and why

The market prices small owner-operated businesses on SDE because the buyer is usually another owner-operator, and to them the owner's pay is part of the return. A one-van plumbing firm, a two-partner consultancy, a single-site café: the buyer runs it, takes the income, and what they are buying is a job with an asset attached. Management-run businesses are priced on EBITDA because the buyer inherits a management team and its cost. As a business grows the owner's pay becomes a smaller share of earnings, a general manager becomes a market cost rather than a choice, and the basis shifts from one to the other. There is no fixed threshold; the question is whether the buyer will be the operator. Business valuation methods used in M&A places both figures among the other methods.

This matters to search funds and individual acquirers in particular, because the searcher is often stepping into the owner's role. To them SDE is the right figure — provided the salary they will need to draw is deducted just as a manager's would be, and the lender's view is taken into account before the price is agreed.

Why multiples on SDE and on EBITDA are not comparable

For the same business, SDE is larger than adjusted EBITDA by the cost of a manager. If the business is worth the same price whichever figure it is expressed on — and it is the same business — then the multiple on SDE must be lower than the multiple on EBITDA in the same proportion. A price expressed as three times SDE and the same price expressed as four times EBITDA are one number that only looks like two. SDE multiples are also drawn from a different population of transactions — smaller, owner-run businesses, sold to individuals, often with premises and vendor finance in the terms — so a multiple observed on one basis carries no information about the other.

The trap: an EBITDA multiple on an SDE figure

The most expensive mistake in small-business acquisition is a buyer who reads a sector EBITDA multiple, sees a memorandum quoting "adjusted earnings" that are in fact SDE, and multiplies one by the other. The result overstates the price by the multiple times the cost of a manager. It is easy to make because a seller's adviser has every reason to present the larger figure, memoranda rarely label it, and rules of thumb quoted in the market seldom say which basis they are on. The defence is procedural: write down which figure you hold, bridge it to the other, and check that the multiple you apply was observed on the same basis. The EBITDA multiple calculator converts a price to a multiple on whatever figure you enter; entering the right one is your job.

Adjusting when the buyer must hire a manager

A financial buyer, a corporate acquirer, or an individual who will not run the business day to day is buying adjusted EBITDA, not SDE, whatever the seller quotes. The adjustment is the full cost of the replacement: salary at the rate the role actually commands in that sector and region, employer contributions, pension, benefits and recruitment. If the owner performed more than one role — sales director and finance director as well as managing director — the replacement cost is more than one salary. And if the owner's relationships are the revenue, part of the earnings may leave with them; no salary adjustment captures that. It is a matter for structure — an earn-out, deferred consideration, a handover period — rather than for the earnings figure. How to value a private company in the UK covers owner dependence as an adjustment in its own right.

A worked example

How lenders look at it

A lender funding an acquisition does not lend against SDE. The loan will be serviced by the business after it has paid whoever runs it, so the lender starts from EBITDA after a market-rate management cost, applies its own view of which add-backs are real — usually a more sceptical one than the seller's — and tests whether the cash left after tax, capital expenditure and working capital covers the debt service with room to spare. A buyer who has priced on SDE and is borrowing against EBITDA will find that the debt on offer supports a lower price than the one agreed, and the gap has to be filled with equity, deferred consideration or a renegotiation. Running the debt service test before the offer, on the lender's basis rather than the seller's, avoids that conversation.

How TrueValue carries both figures

TrueValue keeps EBITDA and SDE as separate figures throughout. The AI CIM analysis extracts revenue, EBITDA, each add-back and SDE per year, so the bridge stays visible rather than collapsing into one "adjusted earnings" line. The valuation engine runs seller's discretionary earnings and EBITDA multiple as two of its five methods on the same inputs, derives SDE from EBITDA without adding depreciation or interest back a second time, and shifts weight from SDE towards EBITDA as earnings scale — and back towards SDE where the business depends heavily on its owner. The deal economics then carry the maintainable earnings figure into the funding plan and the covenant tests — debt service cover, leverage, interest cover and fixed-charge cover — so the lender's question is answered before the offer goes in.