SDE and EBITDA: what is the difference?

The key difference is the assumed owner’s role

A buyer who plans to work full time in a small business may focus on the total benefit available for both their labour and invested capital. A buyer who needs to employ a manager asks a different question: what earnings remain after paying someone to do that work?

SDE and adjusted EBITDA can help frame those questions, but neither is a universally identical calculation across listings and reports. Ask for the reconciliation. If two working owners are leaving, a measure that adds back both salaries without replacing their work can give a misleading impression of the income available.

Compare the assumptions, not just the labels

A simplified owner replacement example

Assume a hypothetical owner-operated business shows $250,000 of SDE after the agreed adjustments. If the work performed by that owner would cost $100,000 a year to replace, a simplified EBITDA-style figure would be $150,000, assuming no other differences. These are illustrative amounts, not salary or valuation benchmarks.

The $250,000 does not represent passive investment income. Part of it compensates the owner for working. Equally, the $150,000 is not automatically free cash flow: capital expenditure, changes in working capital, tax and financing can still affect the cash available.

Keep the earnings measure and multiple consistent

A transaction expressed as a multiple of SDE should not be applied directly to EBITDA. Changing the denominator changes the multiple. The comparable transaction also needs consistent treatment of stock, working capital, debt, cash and the owner’s duties.

Before relying on a broker listing or comparison, request the earnings schedule and identify the period, owner adjustments and assets included in the asking price. The headline ratio alone does not establish that two businesses are comparable. For a signed valuation, the chosen measure should fit the purpose and the operating assumptions.

General educational information. Examples are hypothetical and do not value a real business. The appropriate treatment depends on the purpose, evidence and agreed scope.