SDE vs EBITDA

Published November 9, 2026

In short: SDE adds back the owner’s pay in full. EBITDA charges a market salary for the work the owner does. SDE is common for owner-operated small businesses. EBITDA is more common when the business has management in place.

The key difference

SDE assumes the buyer will step into the owner’s role and treats that pay as part of the buyer’s return.
EBITDA (earnings before interest, taxes, depreciation and amortization) assumes the owner’s work is done by someone paid a market wage, so that wage is deducted.

The same business can therefore show a high SDE and a much lower EBITDA.

Worked example

An invented business with $224,000 of SDE, where one owner works full time. If a manager would cost $80,000 a year with taxes and benefits, adjusted EBITDA is about $144,000. A buyer paying 3.0× SDE ($672,000) is paying about 4.7× that adjusted EBITDA.

Neither number is wrong. They answer different questions.

Which one should you use?

If you will run the business yourself, SDE is a reasonable starting point, but still subtract a fair salary for your own time when judging whether the deal is worth it.
If you will hire a manager, use an EBITDA-style view. Debt payments come out of what is left after you pay that manager.
Whichever you use, compare like with like. Price multiples quoted for SDE and for EBITDA are not interchangeable.

Check the debt coverage either way

Lenders look at whether cash flow covers loan payments with a cushion. The exact requirement is the lender’s, and it varies, so ask any lender you are working with. Learn how we build the numbers in the sample report.

Want this done on a real deal? A Verified SDE Report reconciles the seller’s P&Ls with their tax returns, judges each add-back, and checks debt coverage. See a sample report or get one for $99.

Educational information only, not accounting, tax, legal, lending or investment advice. Check any deal with your own CPA, attorney and lender.