SDE vs EBITDA: which number will your buyer use?

That distinction sounds like accounting housekeeping. It is not. It decides which pool of transaction data your business gets compared against, which multiple applies, and in practice whether you are talking to individual buyers or to private equity. Getting it wrong in either direction produces a number that collapses the first time a buyer's advisor reads your file.

What each one actually contains

Both figures start from the same place, which is the pre-tax profit on your income statement, and both undo the accounting and financing decisions that are specific to you rather than to the business. They part company on one line.

So SDE answers "what is the total financial benefit available to one person who buys this and works in it". EBITDA answers "what does this business earn after paying someone to run it". Both are honest questions. They are asked by different buyers.

The line where buyers switch

The convention in the market is that businesses with earnings up to roughly $1 million are discussed in SDE and larger ones in EBITDA. The threshold is a shorthand for something more useful: whether the business is run by a working owner or by a management team.

If you are the person doing the estimating, the selling, the technical work or the client relationships, your compensation is discretionary. A buyer stepping into your role recovers it, so it belongs in earnings. That is an SDE business, and its likely buyer is an individual, a search-fund style purchaser, or a competitor in the same trade.

If the business has a general manager, an operations lead and a sales function that runs without you, your compensation is a real cost of operating that the buyer must keep paying. That is an EBITDA business, and its buyer pool widens to include private equity and larger strategic acquirers, who bring more capital and cheaper acquisition finance with them.

The interesting consequence is that moving from one category to the other is a strategy, not just a description. Building a management layer that lets the business run without you does two things to the valuation at once: it opens a deeper buyer pool, and it raises the multiple those buyers will pay because the earnings no longer depend on a person who is leaving. It also reduces reported EBITDA in the short term, by the cost of the manager you hired, which is why the sequencing matters and why it takes a few years rather than a few months.

A worked example

Take a hypothetical specialty contractor. The numbers below are illustrative, not a client's, and are chosen to be round rather than realistic to any particular trade.

• Revenue of $4,000,000
• Reported pre-tax profit of $250,000
• Owner's salary of $180,000 plus $30,000 of payroll taxes and benefits
• Interest expense of $40,000 on equipment finance
• Depreciation of $120,000
• A one-time legal settlement of $60,000
• A vehicle and travel that are genuinely personal, at $25,000

SDE comes to $705,000: the $250,000 of profit plus all of the items above, because a working owner recovers the whole $210,000 of their own compensation. At a multiple of three, that is a discussion starting near $2.1 million.

EBITDA on the same business depends on what it would cost to replace the owner. If a general manager for this company costs $140,000 fully loaded, then $140,000 stays in the numbers and EBITDA is $565,000. At a multiple of five, that is a discussion starting near $2.8 million.

Two defensible calculations, two different numbers, and neither is wrong. What would be wrong is taking the SDE figure of $705,000 and applying the EBITDA multiple of five to it, which produces $3.5 million and is not a number any buyer will recognize. That specific error, applying a larger-company multiple to an owner-operated earnings base, is the most common way an owner arrives at an expectation nobody will meet.

Add-backs: which ones survive diligence

Add-backs are where most of the negotiation happens, because every one you can defend is multiplied. At a multiple of four, a $20,000 add-back that holds is worth $80,000 of enterprise value, and a $20,000 add-back that gets struck out costs you the same.

Three tests decide it. Would the expense genuinely disappear under new ownership? Is it visible in the accounting records rather than asserted in a conversation? And does it need replacing with something else that costs money?

Usually accepted: the owner's compensation above market rate, personal vehicles, personal travel and meals, family members on payroll who do not work in the business, one-time legal or settlement costs, the cost of a discontinued product line, rent paid above market to a related party, and startup costs for an initiative that has finished starting up.

Usually rejected: "one-time" costs that appear in three consecutive years, deferred maintenance and capital expenditure the buyer will now have to make, marketing you cut to make a year look better, an owner's salary added back in full when the owner does a job that must be replaced, and anything that exists only as an explanation with no supporting entry.

The practical advice is unglamorous. Stop running personal expenses through the business two to three years before you intend to sell, or code them consistently enough that they are provable. An add-back you can point to in the general ledger is worth several times an add-back you can only describe.

Why this is the highest-leverage number in an exit

Owners tend to focus on the multiple, because it feels like the negotiable part. In practice the earnings base is where the larger and more controllable swings live.

A defensible recast typically moves earnings by a meaningful percentage on its own, before anything about the business changes, purely by describing it correctly. That effect is then multiplied. Meanwhile the multiple responds to work that takes years: reducing customer concentration, building management depth, making revenue recurring rather than repeat-if-we-win-it.

So the order of operations for most owners is: establish the earnings base properly first, because it costs a few weeks and reveals the true starting point, then spend the available runway on the factors that move the multiple. How that number then turns into a price, and what comes out of it before you see any of it, is set out in how much is my business worth.

Getting your own number

A recast is a finite piece of work. It needs three years of profit and loss statements, the corresponding tax returns, a payroll summary, the fixed asset schedule and an honest list of what runs through the business that would not run through it under someone else.

Ascension CFO is not a certified appraisal firm, and a recast is not a formal valuation. What it is, is the input every formal valuation and every buyer's model starts from, and the version we build is the one designed to survive a buyer's advisor rather than to flatter the seller. Where that leaves gaps you still have time to close, that becomes the plan, and the ongoing work is described under exit planning and increasing business value before an exit.

Consulting is billed at $250 per hour and ongoing advisory work runs on monthly plans scaled to the business. The first conversation is a free thirty-minute call, and you can book one on our calendar.