SDE or EBITDA: Which Number Your Books Support

Two owners hear very different multiples for businesses about the same size. One is told roughly 3x. The other hears 6x. Both numbers can be correct, because they are measured against two different earnings metrics. And which metric applies to your business, along with whether a buyer will trust the number, comes down to what your books can actually support.

If you do not know whether your company will be valued on SDE or adjusted EBITDA, you do not really know what any multiple means for you, or whether the number a buyer uses is the right one or a discounted one your records left them free to pick.

Two metrics, two scales

Seller's discretionary earnings, or SDE, answers one question: how much total financial benefit does a single full-time owner pull out of this business in a year. It starts with profit and adds back the owner's salary and payroll taxes, owner perks, interest, depreciation, amortization, and genuine one-time costs. SDE is the standard for owner-operated businesses an individual buyer steps into and runs.

Adjusted EBITDA measures what the business earns as a standalone machine. The key difference is one line: EBITDA subtracts a market-rate salary for whoever has to do the owner's job after the sale. SDE assumes the buyer works in the business for free because they pay themselves out of the earnings. EBITDA assumes someone has to be paid to run it. Same company, same year, two different numbers, and the EBITDA figure is lower by roughly the cost of a general manager.

That gap matters because the two metrics trade on different scales. SDE businesses tend to sell around 2x to 3.5x. Businesses valued on adjusted EBITDA, with real management depth, trade higher, and once a company clears roughly 1 million dollars of EBITDA, private equity and strategic buyers enter and compete. A dollar of earnings is worth noticeably more on the EBITDA scale.

Your books decide the number, not your opinion

Here is where finance readiness enters. The metric a buyer uses is partly a function of your size and structure. But the number inside it, the profit everything is multiplied against, is entirely a function of your records.

Both SDE and adjusted EBITDA start from your financials and layer add-backs on top. Every add-back, the owner comp above market, the personal expenses run through the company, the true one-time costs, only counts if you can document it. A buyer will not take your word for it. In diligence they test each adjustment against the general ledger, the bank statements, and the tax return. Adjustments that are clean and supported survive. Adjustments that are vague or undocumented get stripped out, and every dollar removed comes straight off your valuation at whatever multiple applies.

This is why two businesses with the same real earnings can be valued very differently. Accrual-based books, a real monthly close, and a documented add-back schedule present a defensible number. Cash-basis records held together by the owner's memory hand the buyer a reason to use the lower figure. The metric might be the same. The number your books support is not.

The crossover most owners never model

There is a decision hiding inside the SDE-to-EBITDA jump that deserves an actual spreadsheet, not a gut call.

Say your business throws off 900,000 dollars of SDE and you work in it full time. Valued as an owner-operator business at 3x, that is roughly 2.7 million. Now suppose a competent general manager costs 160,000 dollars all in. Subtract that and your adjusted EBITDA is 740,000 dollars, just under the line where institutional buyers get interested. Grow earnings a little and install that manager, and at 1 million of EBITDA and a 4.5x multiple you are looking at 4.5 million.

You gave up 160,000 dollars a year in salary to get there. In exchange you moved every dollar of earnings onto a higher multiple and built a business that runs without you. For most owners a few years out, it is one of the highest-return moves available, but you can only see it clearly if your books can produce both numbers and model the manager cost honestly.

What to do about it, starting now

You do not decide your metric at the closing table. You set yourself up for the better one over the year or two before you sell.

• Know your number both ways. Have your books produce SDE and adjusted EBITDA with a market-rate manager salary subtracted. The gap between the two valuations tells you what building a management layer is worth.
• Document add-backs as you go. Keep the support for every adjustment so your recast survives diligence instead of shrinking in it.
• Get on accrual-based books with a real monthly close. A defensible number starts with records a buyer can trust.
• Never compare offers without naming the metric. A 3x SDE offer and a 4x EBITDA offer can be nearly identical dollars.
• Watch the 1 million EBITDA line. It is the rough threshold where the buyer pool and the pricing shift in your favor.

This is the readiness work Thryve does with founder-led businesses: clean, accrual-based books, a monthly close that runs without you, and a documented add-back schedule that holds up when a buyer takes it apart. Positioning the metric, building buyer competition, and negotiating the multiple is what our partners at Texas Exit Advisors run. Our job is to make sure the number they take to market is the real, defensible one.

If you are one to three years from a sale, which scale your business sits on is worth answering now, while there is still time to move it. Let's figure out what both of your numbers look like today.

This article is general information, not legal, tax, or accounting advice. Valuation metrics, multiples, and adjustments vary by business, size, and deal. Work with a qualified CPA and your advisors before making decisions based on a valuation estimate.