If you've started looking at small business acquisitions, you've probably seen both terms thrown around in the same conversation, sometimes by the same broker in the same sentence, as if they're interchangeable. They're not, and picking the wrong one can lead you to badly mis-price a deal.
Here's the short version: SDE is for owner-operated small businesses. EBITDA is for businesses large enough to run without their owner. The line between the two isn't a fixed revenue number — it's a question about who the buyer is actually paying to replace.
What each one actually measures
EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — starts from net income and adds back four specific things: interest expense, taxes, depreciation, and amortization. That's it. It assumes the business already has a market-rate management team in place, and a financial buyer (private equity, a strategic acquirer) is simply valuing the cash flow that team produces.
SDE — Seller's Discretionary Earnings — starts from the same place but adds back one more thing EBITDA doesn't: the owner's own compensation and any other benefits that flow through the business for the owner's personal benefit (a company vehicle, health insurance, a family member on payroll who doesn't really work there, one-time personal expenses run through the books). SDE answers a different question: what would this business generate in total benefit for a single owner-operator who works in it full-time?
Why the distinction matters, concretely
Say a business has $150,000 in net income, and the owner pays themselves $90,000 a year to run it day-to-day.
- EBITDA-style thinking would look at that $150,000 (plus interest/tax/D&A add-backs) and assume a buyer needs to hire someone to replace the owner — so that $90,000 salary is a real, ongoing cost, not something to add back.
- SDE-style thinking adds the $90,000 back, on the theory that a buyer who plans to run the business themselves doesn't need to pay a separate salary for that role — the owner's labor is the return, not a cost against it.
Using SDE on a business that actually needs a full management team (because you, the buyer, aren't planning to work in it 60 hours a week) will make the business look far more profitable than it actually is to you. Using EBITDA on a true owner-operator shop will understate what the business is really worth to someone willing to run it themselves.
The rule of thumb brokers actually use
Most business brokers draw the line somewhere around $1-2 million in annual revenue, or somewhere in the $200K-$1M EBITDA/SDE range, as the rough zone where valuation convention shifts from SDE to EBITDA. Below that: SDE, because these are overwhelmingly owner-operated businesses where the owner's labor is a real part of what's being sold. Above it: EBITDA, because there's usually already a management layer in place, or the business is large enough that private equity and other institutional buyers — who think exclusively in EBITDA multiples — are the natural buyer pool.
But treat that as a strong default, not a rule. The actual test is simpler: if you removed the current owner tomorrow, would you need to hire someone, or would you personally step into that role? If you'd step into it, ask for SDE. If you'd need to hire a general manager, ask for EBITDA — and make sure whatever multiple you're being quoted is actually calculated on the same basis.
Where this goes wrong in practice
The single most common mistake we see: a broker or a CIM quotes a multiple ("this business trades at 3x") without being explicit about which earnings base that multiple applies to. A 3x SDE multiple and a 3x EBITDA multiple on the same business can imply wildly different prices, because the underlying earnings figure itself is different — SDE is almost always the larger number, since it includes the full owner-compensation add-back that EBITDA doesn't.
Before you anchor on any quoted multiple, confirm three things: which earnings measure it's being applied to, what specific add-backs went into that figure, and whether those add-backs are actually documented in real financials (tax returns, a detailed P&L) or just asserted in a marketing memo. A CIM stating "owner compensation of $65,000-$140,000" is a starting point for a conversation, not a number to build a valuation on until you've seen the underlying payroll records.
The takeaway
SDE and EBITDA aren't two ways of saying the same thing with different words — they answer two different questions about who's going to run the business after you buy it. Get the wrong one applied to your specific situation, and every multiple you see afterward is built on a foundation that doesn't match your actual plan for the business. Ask which measure is being used before you ask what multiple applies to it.