SDE vs EBITDA — Which One Does Your Buyer Care About?
Above $1M EBITDA, buyers stop adjusting for the owner. Below it, they have to.
The bottom line
Use SDE when the business is genuinely owner-operator dependent (one person doing the work) and selling to an individual buyer. Use EBITDA when there's a real management bench, when EBITDA is $1M+, or when PE/strategics are in the buyer pool. Many businesses get presented as SDE when they should be EBITDA — that costs the seller turns on the multiple because SDE-style multiples are lower in absolute terms, even if the SDE number is bigger.
Side-by-side comparison
| Aspect | SDE (Seller's Discretionary Earnings) | EBITDA |
|---|---|---|
| Includes owner comp? | Yes — added back to earnings | No — market-rate owner comp deducted |
| Typical business size | <$1M owner earnings | $1M+ EBITDA |
| Typical buyer | Individual on SBA financing, family-owned competitor | PE platform, strategic acquirer, larger consolidator |
| Multiple range | 1.5x-3.5x SDE typical for trade services; 2-4x for retail; 3-5x for stable B2B services | 5-7x for solid SMB; 8-12x for platform-tier; 12-18x for premium verticals (healthcare-IT, vertical SaaS) |
| What add-backs get questioned | Country club, personal vehicle, spouse on payroll, owner-paid utilities | All of the above PLUS market-rent if real estate is owner-occupied, market-rate replacement management cost |
| When QofE narrows the number | QofE on SDE deals usually swings 10-25% lower than the seller's claim | QofE on EBITDA deals typically swings 15-30% lower; bigger spread because more line items get challenged |
| Right format for buyer | SDE table with itemized add-backs, current owner's W-2 + distributions | EBITDA bridge from book net income, normalized owner comp, working-capital normalization |
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Based on standard M&A practice and 4 years of healthcare-services M&A advisory experience. Edge cases vary by deal - not legal or tax advice. Methodology