Owners get burned in valuation conversations because they confuse SDE and EBITDA. Brokers throw both around interchangeably; lender pre-approvals use one and PE LOIs use the other. The result: an owner thinking they have a $5M business when they actually have a $3.2M business, or vice versa.

This article fixes that.

The one-line difference

SDE adds back the owner’s compensation. EBITDA doesn’t.

That’s the entire substantive distinction. Everything else is downstream of that one accounting choice.

Why two metrics exist

Both metrics try to answer the same question — what does this business actually earn? — but for different buyers.

Small-business buyers (individuals, SBA-financed acquirers, small-fund searchers) plan to work in the business after they buy it. They’ll draw a salary from operations. So when they evaluate the business, they want to know: how much total cash does this business generate for one working owner? That’s SDE.

Mid-market buyers (private equity, family offices, strategic acquirers) plan to install professional management. The CEO, COO, or GM will be a hired employee whose salary is a real, ongoing expense. So they want to know: how much does this business earn after paying the management it needs to run? That’s EBITDA.

The metrics are tools optimized for different buyer types. Neither is “right” or “wrong” — they’re answering different questions.

When SDE applies

Use SDE when:

Examples that almost always price on SDE: most service businesses under $5M revenue, most independent restaurants, most owner-operated retail, most single-location healthcare practices.

When EBITDA applies

Use EBITDA when:

Examples that almost always price on EBITDA: any business over $10M revenue, manufacturers and distributors, multi-location healthcare, multi-location service businesses, any PE roll-up target.

The messy middle ($750K–$1.5M earnings)

Most deal disputes happen here. The same business might attract:

If those two numbers differ — and they usually do by 20–40% — you have a buyer-mix decision, not a math error.

The right move: present both. A professional CIM in this range typically shows:

Reported Net Income       $X
+ Add-backs               $Y
= SDE                     $Z

SDE                       $Z
- Market manager salary   ($130K)
= Adjusted EBITDA         $Z - $130K

Then list the typical multiple for both metrics and let buyers from different pools value your business on the metric that fits their model.

How to translate between SDE and EBITDA

The translation isn’t subtracting your actual salary. It’s subtracting what a buyer would pay a hired manager to do your job.

Step 1: Determine market manager compensation

Use Bureau of Labor Statistics data, Glassdoor / Salary.com, or industry benchmarks. For most small businesses, a competent GM costs:

Business sizeApproximate market GM compensation
Under $1M revenue$70K – $110K
$1M – $3M revenue$90K – $150K
$3M – $7M revenue$120K – $200K
$7M – $15M revenue$160K – $280K

Add benefits and payroll tax (~25% loaded). A $130K GM costs the business ~$162K all-in.

Step 2: Convert

EBITDA (adjusted) = SDE - All-in market manager comp

If your SDE is $850K and a market GM costs $130K + $32K benefits = $162K loaded:

Adjusted EBITDA = $850K - $162K = $688K

If buyers in your industry pay 4.5x EBITDA, your enterprise value is $688K × 4.5 = $3.1M.

If those same buyers pay 3.5x SDE for SBA deals, your value is $850K × 3.5 = $2.97M.

In this example, the two metrics produce roughly the same answer (~$3M) — which is what you should expect when you do the math correctly. Big gaps usually indicate either a wrong multiple or a wrong manager salary assumption.

Common mistakes owners make

1. Subtracting their actual salary instead of market rate

If you draw $300K but the market manager rate is $130K, you keep $170K of “owner premium” in your earnings. That’s real value the buyer benefits from too — they can keep that owner premium by paying themselves above market.

2. Using SDE multiples on EBITDA

A 4x SDE multiple isn’t the same as a 4x EBITDA multiple. If a competitor sold at “4x earnings” — find out which earnings metric. EBITDA-based 4x is a much higher absolute price for the same business.

3. Using public-company EBITDA multiples

A small business that would qualify as EBITDA-priced still won’t get public-comp multiples. Public companies trade at 12x–25x EBITDA in many sectors; private small businesses in those same sectors trade at 4x–8x for the exact same earnings.

4. Ignoring add-backs in EBITDA

EBITDA still includes add-backs for non-recurring expenses, owner perks, and personal items. The only structural difference from SDE is the management compensation treatment.

How to know which one a buyer is using

Ask, plainly, in the first conversation: “Are you offering at a multiple of SDE or adjusted EBITDA, and what manager comp assumption are you using in EBITDA?”

If they hedge or say “earnings,” push: “I want to compare your offer to others on a like-for-like basis. Please specify.”

A buyer unwilling to be specific is probably trying to compress the number. A professional buyer will answer immediately.

What to do now

  1. Calculate your SDE — see What is SDE for the full method.
  2. Look up a market-rate GM salary in your industry and size range.
  3. Calculate adjusted EBITDA = SDE − loaded market GM cost.
  4. Pull both your industry’s SDE multiple range and EBITDA multiple range from our benchmarks.
  5. Calculate both implied values. They should be in the same ballpark — if they’re not, dig into your assumptions.

For a real-world price range using both methods on your specific financials, the free valuation is the fastest way to get a defensible number.