SDE vs. EBITDA Explained

The Core Difference

The fundamental difference between SDE and EBITDA is owner compensation: SDE adds the owner's salary back into earnings, while EBITDA does not. Both start from profit and add back interest, depreciation, and amortization — but SDE also adds back one owner's pay and personal expenses, because a small business is run by a working owner, while EBITDA leaves management salary in, because a larger business runs on paid management.

Which One Applies to Your Business

The dividing line is roughly size and how the business is run:

• SDE — smaller, owner-operated businesses, generally under about $1 million in earnings, where a single owner works in the business
• EBITDA — larger businesses, generally $1 million+ in earnings, run by professional management rather than a hands-on owner

The threshold isn't rigid — it's about whether the buyer will run the business themselves (SDE thinking) or install management (EBITDA thinking).

How They Relate

The two are connected: SDE roughly equals EBITDA plus one owner's compensation. If a business has $500,000 of EBITDA and the owner takes a $150,000 salary that would need to be replaced, its SDE is about $650,000. This matters at the boundary between small and mid-market, where a business could be viewed either way, and where how it's presented affects the perceived earnings and the multiple applied.

Different Metrics, Different Multiples

Because the metrics differ, so do their multiples — and you can't compare them directly. Small businesses sell for 2x to 4x SDE; mid-market businesses for 3x to 7x EBITDA. An EBITDA multiple looks higher partly because EBITDA is a smaller number than SDE for the same business (it doesn't include owner pay). Always match the multiple to the metric — applying an EBITDA multiple to an SDE figure (or vice versa) produces a badly wrong value.

Why It Matters for Your Sale

Using the right metric — and the matching multiple — is essential to an accurate valuation. A business near the boundary should be analyzed carefully, since the framing affects the number. This is one more reason to work with a professional who knows which method fits your business and how buyers in your size range actually think. See how businesses are valued.

Frequently Asked Questions

Martin Navarro · Business Broker & M&A Advisor

Martin Navarro advises business owners across Los Angeles, Ventura, and Southern California on selling, buying, and valuing privately held companies. A U.S. Marine Corps veteran with dual CSUN degrees in Business Management and Accounting, he brings hands-on transaction experience and a straight-talking, numbers-first approach to every engagement. Bilingual in English and Spanish.