SDE vs. EBITDA: Which Metric Should U.S. Business Owners Use to Value Their Business?

When business owners hear about “valuation,” two acronyms often come up: SDE (Seller’s Discretionary Earnings) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Knowing the difference between them helps you pick the right metric—and avoid undervaluing or overpromising.

Below is a basic “Business Valuation 101” explanation of both, when each is used, and which is likely right for your company.

What is SDE (Seller’s Discretionary Earnings)?

• SDE measures the total financial benefit an owner gets from their business. It starts with net profit (what’s left after costs) and adds back certain items: the owner’s full salary, benefits, discretionary or personal expenses run through the business, interest, taxes, depreciation, amortization, and non-recurring expenses.
• Example: Suppose your business had a net profit of $200,000 last year. You paid yourself $80,000, had $10,000 in personal benefits, $5,000 in nonrecurring legal costs, etc. After adding those back, your SDE might be $300,000.
• SDE is commonly used for smaller or owner-operator businesses—main street businesses where the buyer will also take on much of your role. It gives a realistic sense of what the new owner could expect to “take home.”

What is EBITDA?

• EBITDA is net profit plus interest, taxes, depreciation, and amortization. It excludes the owner’s benefits, the owner’s full salary (or only adds back part of it if above market rate), and removes non-operating, discretionary expenses.
• Example: Using the same business, if net profit is $200,000, interest is $10,000, taxes $20,000, depreciation & amortization $15,000, then EBITDA might look like $245,000 (without adding back all of the owner’s salary and personal benefits).
• EBITDA is often used by larger businesses, private equity firms, or strategic buyers who want to isolate how the core operations perform, without how the current owner runs personal expenses.

Key Differences & Why It Matters

*Based on recent U.S. market data. SDE multiples for many small businesses are between ~2.0×–3.2× when financials are clean. Adjusted EBITDA multiples in lower middle markets trend 4-8× with favorable conditions.

When to Use Each Metric

• If your business has under $1-$1.5 million in earnings and you (the owner) are heavily involved, SDE is probably the right metric.
• If your business is growing, has multiple managers, or you’re targeting institutional or strategic buyers, EBITDA is more appropriate.
• Also, if you want to compare your company to others in your industry (for sale or recently sold), use the metric most commonly used in those comparisons.

U.S. Market Insights

• The latest IBBA Market Pulse reports show that for businesses between $2 million and $50 million valuation, earnings multiples tend to increase when companies have strong recurring revenue, predictable cash flows, and limited customer or supplier concentration.
• Data indicates revenue multiples are often under 1× gross revenue for many small businesses unless there is high growth or recurring contracts. Earnings multiples (SDE basis) are better indicators for most small business buyers. 

Which Metric Should You Use?

Ask yourself:

• Is most of your earnings coming from your own labor, perks, or discretionary spending?
• Are you planning to step away or reduce your role?
• Are you targeting strategic buyers or more traditional owner-operators?
• How clean and standardized are your financials?

If you answer yes to many of the above, SDE might make sense. If no, use EBITDA.

Before you decide, see what buyers now might pay for your business under both metrics. Get your free valuation estimate with MyBizWorth. We’ll run both SDE- and EBITDA-based scenarios so you understand what’s fair.

Start your free valuation estimate today with MyBizWorth