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SDE vs. EBITDA: Which One Actually Matters for Your Business?

Both are ways of measuring a business's true earnings — but they're built for businesses at different stages, and using the wrong one can distort your valuation.

What each one measures

SDE — Seller's Discretionary Earnings — starts with net income and adds back the owner's full compensation, benefits, and personal expenses run through the business, plus interest, taxes, depreciation, and amortization. It's designed to answer a specific question: if I bought this business and worked in it myself, what would it generate for me?

EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — normalizes for interest, taxes, and non-cash charges, but typically only adds back one owner's compensation at a fair market-rate salary, not the owner's full pay. It assumes the business is run by a management team that would need to be paid regardless of who owns it.

Which one applies to your business

SDE is the standard for smaller, owner-operated businesses — generally where the owner is still working full-time in the business and there isn't a full management layer below them. EBITDA becomes more relevant as a business scales and could reasonably run without its current owner in the room every day.

There's no hard revenue cutoff where one replaces the other — it's really about how dependent the business is on the owner personally. A $2M-revenue business with a strong general manager might be more appropriately valued on EBITDA than a $5M-revenue business where the owner still touches everything.

Why the distinction matters

Using the wrong metric — or applying an industry multiple meant for one to the other — can produce a wildly inflated or deflated estimate. A multiple built around EBITDA assumes a management-run business; applying it to a number that already includes the owner's full salary double-counts that value.

It's also worth knowing which one buyers in your industry and size range typically use, since that's the conversation you'll actually be having once you're in a real process.

See how OwnerGauge applies this in practice →