EBITDA vs. SDE: Which Metric Matters When#
Most business owners have never calculated SDE. Most buyers have never trusted EBITDA on a small deal. That mismatch alone kills negotiations before price ever comes up.
Two Different Audiences, Two Different Formulas#
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was built for larger companies with professional management teams and no owner drawing a salary out of the business. SDE (Seller's Discretionary Earnings) was built for exactly the opposite: a business run day to day by its owner, where the owner's compensation, perks, and one-off expenses need to be added back to show what the business actually generates.
Apply EBITDA to a business grossing under $5M and you understate what the business is really worth to a buyer stepping into the owner's role. Apply SDE to a business north of $10M or $15M with a full management team, and you inflate earnings by adding back a salary that a replacement manager would actually need to be paid.
What It Costs When You Use the Wrong One#
Sellers who lean on EBITDA on a small deal leave real value on the table, since add-backs that SDE would capture (personal vehicle, one-time legal fees, above-market owner salary) never get counted.
Buyers who accept SDE on a business too large to run solo often underestimate what it'll cost to hire a GM after close, and the deal looks more profitable on paper than it will in practice.
Lenders and buyers price risk differently depending on which number is used, so a mismatch here can stall financing conversations before a term sheet is even drafted.
The Fix#
Check revenue and structure first, not just size. Under roughly $5M in revenue and one owner-operator running the business: use SDE. Above that, with a management layer already in place: EBITDA is the more accurate lens.
Know the formulas.
SDE = Net Profit + Owner's Salary + Add-Backs (personal expenses, one-time costs, non-cash items)
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
Read it this way: SDE assumes a new owner replaces you personally. EBITDA assumes a new owner replaces you with a hire.
Ask which number the buyer's lender expects. SBA lenders default to SDE for small deals. Search funds and PE buyers usually think in EBITDA multiples, even on smaller acquisitions, so know your audience before you lead with a number.
Get both calculated if the deal is anywhere near the crossover point ($3M to $8M revenue), since the metric you lead with can shift buyer perception of value by a meaningful margin.
Where Openfair Fits#
Openfair's CPA-backed team works through this exact mismatch with sellers directly, matching the right metric to the right buyer pool before a listing ever goes live.
Getting This Right Early#
Getting this number right before a listing goes live saves weeks of back and forth once buyers start asking questions.
FAQ#
Is SDE always higher than EBITDA? Usually, yes, for businesses in the size range where SDE applies, because it adds back the owner's full compensation on top of the standard EBITDA add-backs.
Can I use both numbers in a listing? Yes, and for businesses near the size crossover it often builds credibility to show both, since it signals the seller understands how different buyer types will evaluate the deal.
Does the multiple change depending on which metric is used? Yes. SDE multiples for small businesses typically run lower (2x to 4x) than EBITDA multiples for larger, more institutionally run companies (4x to 8x+), so comparing multiples across metrics without adjusting is a common mistake.
What if my business is right at the crossover point? Calculate both and see which one a buyer in your target range is more likely to expect, then lead with that one in your listing and materials.