SDE vs. EBITDA: A Business Owner's Guide to Choosing the Right Valuation Metric
Deciding to sell your business is a significant step. But when figuring out its value, you might feel lost in confusing financial terms. This is a common source of stress for owners—how do you know what your business is truly worth to a potential buyer?
The answer often comes down to two key metrics: Seller's Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). While both measure profitability, they tell very different stories. At First Choice Business Brokers Atlanta Metro, we understand this confusion and are here to simplify it for you.
Understanding Your Business’s Value: SDE vs. EBITDA
Choosing the right valuation metric is the first step to a successful sale. It’s not a one-size-fits-all decision; it’s about choosing the right tool for the job.
Seller’s Discretionary Earnings (SDE)
Think of SDE as the total financial benefit a single, hands-on owner-operator gets from the business in a year. This is the preferred metric for small to medium-sized companies where the owner is heavily involved in daily operations.
How it works: SDE starts with the business's net profit and then adds non-essential, owner-specific expenses. At FCBB Atlanta Metro, we use this metric because it provides a clear picture of the total cash flow available to a new owner, including their potential salary and all the "perks" the business offers.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
EBITDA, on the other hand, is a standardized measure of a company's operational profitability. It's the go-to metric for larger, more corporate businesses with multiple management layers and complex capital structures. It shows how well a company performs regardless of its financing or tax situation.
How it works: EBITDA strips away things like interest (the cost of debt), taxes, and non-cash expenses (depreciation and amortization). It’s about assessing the business's raw earning power from its core activities.
The Key Differences: What They Really Mean for You
- Focus: SDE focuses on the owner's benefit. It's designed to show a new owner-operator what they can expect to earn. EBITDA focuses on operational profit. It compares a company’s performance to its peers and assesses its ability to service debt.
- Owner’s Compensation: This is the most significant distinction. SDE adds back the owner’s salary and personal benefits (like health insurance or a company car), while EBITDA treats these as regular business expenses.
- Add-Backs: SDE is more flexible with "add-backs," including any non-recurring or personal expenses run through the business (e.g., one-time legal fees, travel). EBITDA's add-backs are more standardized and limited to interest, taxes, depreciation, and amortization.
- Best Use Case: As a rule of thumb, SDE is best for businesses valued at under $5 million, while EBITDA is more common for companies valued above $5 million.
| Feature | Seller's Discretionary Earnings (SDE) | Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) |
|---|---|---|
| Primary Audience | Owner-operators, Small Business Buyers | Institutional Investors, Lenders, Corporate Buyers |
| Core Purpose | To show the total financial benefit to a new owner | To show the operational profitability of the company |
| Owner's Salary | Added back to net profit | Included as an operating expense |
| Add-Backs | Broad (discretionary, non-recurring, personal expenses) | Narrow (Interest, Taxes, Depreciation, Amortization) |
| Typical Business Size | Small to Medium-Sized (<$5M) | Medium to Large-Sized (>$5M) |
The FCBB Plan for Your Business Valuation
When you partner with First Choice Business Brokers Atlanta Metro, we don't just hand you a number. We provide a clear, proven plan to get you the best possible value for your business.
Step 1: Your Free, Confidential Valuation. We start with a professional, no-obligation valuation. We'll help you determine whether SDE or EBITDA is the right metric for your business and use it to calculate its most accurate market value.
Step 2: Presenting Your Business with Confidence. We create a compelling marketing package highlighting your business's earning potential to qualified buyers, using the metric that best tells your story.
Step 3: Finding Your Perfect Buyer. We leverage our vast network of pre-screened buyers and investors to find the right person to appreciate your business's value, whether SDE or EBITDA.
Our expertise ensures that the correct metric attracts the right buyer, maximizing your final sale price.
Don't Guess Your Business's Value
Understanding the difference between SDE and EBITDA is crucial, but it's only one part of a complex process. You’ve built your business from the ground up—don’t leave its valuation up to chance.
The first step toward a successful and stress-free sale is a professional valuation. We can help you stop guessing and start preparing.
Ready to find out what your business is truly worth?
Contact First Choice Business Brokers Atlanta Metro today for a confidential, no-obligation consultation.
FREQUENTLY ASKED QUESTIONS
What is a typical SDE multiple?
SDE valuation multiples vary widely by industry, business size, and location. They are a starting point, and a broker can provide a more accurate multiple based on comparable sales in your market.
What expenses can be added back to SDE?
Common add-backs include the owner’s salary and benefits, personal travel, one-time legal fees, non-essential vehicle expenses, and other personal items paid for by the business.
When is EBITDA the right metric for my business?
EBITDA is generally the right metric for businesses with professional management, multiple locations, or revenues over $5 million.
How can FCBB help me with my business valuation?
At FCBB, we provide a professional valuation based on industry data and market trends. We will guide you on whether SDE or EBITDA is the best metric for your business and help you use that information to attract the right buyers.
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