SDE vs EBITDA: which profit to use

When the owner works in the business, a buyer does not count the company’s abstract profit but what is left for the person who will take that seat. That is why small businesses are often looked at on SDE and larger ones on EBITDA.

What EBITDA is

EBITDA is earnings before interest, taxes, depreciation and amortisation. The pay of the owner and managers is counted in it as a cost. It fits a business that runs without the owner in the day-to-day.

What SDE is

SDE (Seller’s Discretionary Earnings) is the income the business gives one working owner. You take profit before tax and add the owner’s salary, personal expenses run through the company and one-off costs.

An illustrative example

• profit before tax: 400,000
• + the owner’s salary: 300,000
• + personal expenses through the business (car, trips): 50,000
• + a one-off cost that will not repeat: 30,000
• SDE: 780,000. If you hire a manager at a market salary, EBITDA will be noticeably lower.

When to use which

• SDE: the owner works in the business every day and the buyer is buying themselves a job (a café, a salon, a small studio).
• EBITDA: there is a manager, processes are written down and the business runs without the owner. The larger the company, the more often EBITDA is used.

Common mistakes

• adding back “personal” expenses without documents: a buyer will not accept them;
• ignoring the market salary of a manager when calculating EBITDA;
• applying an SDE multiple to EBITDA or the other way round: they are different measures with different ranges.