The short answer: SDE (Seller's Discretionary Earnings) adds one owner's salary and perks back in, so it's the total benefit to a single owner-operator, the right number for Main Street businesses under ~$1M in earnings. EBITDA leaves owner pay out because it assumes a hired manager runs things, the right number for larger, manager-run companies. SDE is always the bigger number, so it carries a lower multiple. To convert: EBITDA = SDE − a market manager's salary.
SDE vs EBITDA, side by side
| SDE | EBITDA | |
|---|---|---|
| Stands for | Seller's Discretionary Earnings | Earnings Before Interest, Taxes, Depreciation & Amortization |
| Adds back owner's salary? | Yes, one owner | No |
| Assumes who runs it | An owner-operator (you) | A hired manager |
| Typical deal size | Under ~$1M earnings / <$5M price | Larger, mid-market |
| Relative size | Bigger number | Smaller number |
| Typical multiple (2026) | ~2 to 4× | ~3 to 6×+ |
The single most important row is the owner's salary. SDE adds it back; EBITDA does not. That one difference is why the same business shows a much higher SDE than EBITDA, and why you can never compare a "3×" on one to a "3×" on the other.
What each one actually measures
SDE, the owner-operator's whole paycheck
SDE answers: "If I buy this business and run it myself, how much total money does it put in my pocket in a year?" That includes the profit and the salary you'd pay yourself and the perks the current owner runs through the books.
SDE = net profit + one owner's salary & perks + interest + taxes + depreciation + one-time add-backs
EBITDA, the earnings a passive owner keeps
EBITDA answers a different question: "If I hire a manager to run this and just own it, what does it earn?" So it does not add owner pay back, because you'd have to pay a real manager to replace that work.
EBITDA = net profit + interest + taxes + depreciation + amortization
Why the labels matter
SDE and EBITDA are close cousins, both strip out interest, taxes, and depreciation. The only real difference is whether one owner's salary is added back. Get that straight and the rest is arithmetic.
When to use each
- Use SDE when a single owner works in the business day to day, the corner HVAC company, the laundromat, the local accounting practice. This is most deals under about $5M.
- Use EBITDA when the business already runs on a management team the buyer will keep, or when earnings climb past roughly $1M and buyers are financial (private equity, larger strategics).
- In the gray zone ($750k, $1.5M earnings), sellers often quote SDE to look cheaper and buyers reframe in EBITDA to price the manager they'll need. Both can be "right", just convert before you compare.
Worked example: converting SDE to EBITDA
Say a distribution business shows $300,000 SDE. The owner works full-time as the general manager. To replace that role you'd pay a manager about $110,000 all-in. Here's the conversion, and what it does to the price at a typical multiple:
| Line | SDE view | EBITDA view |
|---|---|---|
| Owner earnings | $300,000 | $300,000 |
| Less: replacement manager salary | −$110,000 | |
| Earnings used | $300,000 (SDE) | $190,000 (EBITDA) |
| Multiple applied | 3.0× SDE | 4.7× EBITDA |
| Implied price | $900,000 | $893,000 |
Notice the two prices land in the same neighborhood, that's the point. A 3.0× on SDE and a 4.7× on EBITDA are describing the same deal. The multiples differ only because the earnings numbers differ. This is exactly why you convert before comparing two listings that quote different metrics.
SDE and EBITDA aren't rivals. They're the same earnings seen through the eyes of two different owners.
The classic trap
A broker quotes "only 3× EBITDA, a steal!" but the number is really SDE. At the true EBITDA, it's closer to 5×. Always ask: does this figure include the owner's salary? If it does, it's SDE, not EBITDA.
Price a deal both ways
Enter earnings and industry to see the value range, then stress-test the loan.
Keep going
Frequently asked questions
SDE adds one owner's salary and perks back into earnings, so it measures the total benefit to a single owner-operator. EBITDA leaves owner pay out because it assumes a hired manager runs the business. SDE is therefore a bigger number and carries a lower multiple than EBITDA.
Use SDE for owner-operated Main Street businesses, usually under about $1M in earnings, where a single owner works in the business. Use EBITDA for larger, manager-run companies. Most deals under $5M use SDE.
Subtract a fair market salary for the manager who would run the business from SDE. Example: $300,000 SDE − $110,000 manager salary = $190,000 EBITDA. Convert before comparing, because the two carry different multiples.
No. Because SDE is a bigger number, SDE multiples are lower (often 2 to 4×) while EBITDA multiples are higher (often 3 to 6×+). Always confirm which earnings figure a multiple applies to before comparing two deals.
Sources
- Small business multiples and median sale data, BizBuySell Insight Report (2026).
- Industry multiples by sector, Acquisition Ace multiples data (2026).
