SDE vs EBITDA: how buyers read your earnings
Why two earnings numbers exist
A buyer pays for future cash flow. The question is whose cash flow. An owner-operator who will run the business personally cares about everything the business pays out to its owner, which is SDE. An investor who will hire a manager cares about what is left after that salary, which is adjusted EBITDA.
The same business can look very different on each. A $1M SDE business with a $150K replacement manager has $850K of adjusted EBITDA. The calculator shows both so you can see which buyer pays more and why.
The SDE formula, step by step
SDE = net profit + tax + interest + D&A + owner salary and benefits + personal costs + one-off costs. The earnings bridge above walks through each step in that order, so you can see exactly where the value comes from.
Only add back what a buyer can verify. Every add-back should have an invoice, a payslip or a contract behind it. See how buyers grade 20 common adjustments in the 2026 EBITDA Add-Back Standard (opens in a new tab).
Adjusted EBITDA and the replacement salary
The replacement salary is the most argued number in a lower mid-market deal. Set it too low and the buyer resets it in diligence, which feels like a price cut late in the process. Use what you would actually pay a capable general manager in your market, including benefits.
If you already have a manager on the payroll, the replacement salary may be close to zero, and your adjusted EBITDA is your reported EBITDA plus personal and one-off add-backs.
What moves the multiple
Size matters most. Larger earnings attract more buyers with cheaper capital, so multiples step up at each band in the table above. Recurring revenue, low owner dependence and a clean customer spread add to that. Concentration, declining revenue and messy books take away.
Compare your sector with our sector multiples. For software, the SaaS valuation calculator (opens in a new tab) prices recurring revenue directly.
From earnings to a deal
The headline price is only part of the deal. Smaller transactions often include a seller note, and larger ones an earnout or rollover. Model how the price is paid with the deal structure comparison and the capital stack builder.
Acquiry runs sell-side processes for owners in any sector and any market, from first numbers through to completion.
Frequently asked questions
- What is the difference between SDE and EBITDA?
- Seller's Discretionary Earnings is EBITDA plus the full owner salary and benefits, personal costs and one-off costs. It shows what one owner-operator takes out of the business. EBITDA keeps a salary for whoever runs the business, so it shows what the business earns for an investor who will hire a manager.
- How do I calculate SDE?
- Start with net profit, add back tax, interest, depreciation and amortisation to reach EBITDA, then add the owner salary and benefits, personal costs run through the business and genuine one-off costs. Every add-back needs a document a buyer can check.
- What is adjusted EBITDA?
- Adjusted EBITDA is SDE minus the market cost of a manager to replace the owner. It is the number private equity, search funds and most strategic buyers price on once a business is beyond roughly $1M of earnings.
- When is a business valued on SDE instead of EBITDA?
- Businesses with under about $1M of SDE, where the owner is central to sales or delivery, are usually valued on SDE because the most likely buyer will run the business personally. Larger businesses, or those with a manager already in place, are valued on adjusted EBITDA.
- What SDE multiple do small businesses sell for?
- Most owner-operated businesses sell for about 2x to 4x SDE. The multiple rises with size, recurring revenue and how little the business depends on the owner, and falls with customer concentration or declining revenue.
- What EBITDA multiple do lower mid-market businesses sell for?
- Businesses with $1M to $5M of adjusted EBITDA typically trade between 4x and 8x, with software and recurring-revenue businesses higher. Above $5M of EBITDA, private equity competition usually pushes multiples higher again.
- Which add-backs do buyers accept?
- Buyers accept owner compensation above a market salary, personal costs with clear receipts, and costs that genuinely will not repeat. They reject recurring costs labelled as one-off, under-market rent from a related party and add-backs without documents.
- Can I use this calculator for an SBA loan valuation?
- It gives a good starting range. SBA-backed buyers price on SDE and lenders need debt service cover of about 1.25x, so the price a bank will fund depends on the SDE remaining after the replacement salary and loan payments.