Two advisors look at the same business. One says "your earnings are $620,000," the other says "your earnings are $450,000." Both are right — they're using different conventions, and the difference between them is one line: who pays the person who runs the business. Until you know which convention a quoted multiple belongs to, every valuation number you hear is noise.
Both measures start from operating earnings and remove interest, taxes, depreciation, and amortization. Then they split:
Seller's discretionary earnings adds back one working owner's entire compensation: salary, payroll taxes, benefits, and the personal expenses run through the company (the add-backs). It answers the question a main-street buyer is actually asking: "If I buy this business and work in it, what is the total economic benefit I take home in a year?"
EBITDA goes the other way: it charges the business a market-rate salary for the manager required to run it, whether or not anyone currently draws one. It answers the investor's question: "What does this business earn as a system, after paying everyone needed to operate it — including whoever replaces the owner?"
| SDE | EBITDA | |
|---|---|---|
| Owner / manager pay | Added back in full (one owner) | Market replacement salary subtracted |
| Typical business | Owner-operated, main street | Management in place, lower middle market |
| Typical buyer | Individual owner-operator | Private equity, strategic, investor |
| Relative size | Always the larger number | Always the smaller number |
| Multiple range | Lower | Higher |
There is no bright line where SDE pricing stops and EBITDA pricing starts. The practical test is whether the business runs without the owner in the building: a real second layer of management, documented processes, and earnings comfortably above what one operator could produce alone. Deals in the crossover zone are often negotiated on both lenses simultaneously — a buyer pencils the EBITDA case, an SBA lender underwrites the SDE case, and the final price has to clear both. Where your industry's ranges sit under each lens is covered on the multiples by industry page.
The single most common self-valuation error: hearing that businesses like yours trade at "five to six times" — an EBITDA multiple for larger operations — and applying it to your SDE. Both inputs are real. The combination is fiction, routinely overstating value by half or more. A business listed on that math doesn't get negotiated down; it gets ignored, sits unsold, and goes stale. The reverse error — letting a buyer apply an SDE-range multiple to your EBITDA — quietly underprices a management-in-place business. Convention mismatch is the first thing to check when any quoted number surprises you in either direction.
Run the free SDE calculator to see your owner-operator number with add-backs modeled in — no signup, about two minutes. Or read the full how businesses are actually priced guide, then start a confidential inquiry when you want the lenses applied to your actual financials.
SDE is defined around one working owner. With two, convention adds back one owner's compensation and charges a market salary for the second's role. Skipping that adjustment overstates earnings by an entire salary — buyers and lenders catch it immediately.
No. "Adjusted EBITDA" is EBITDA with documented one-time and non-operational items normalized — it still carries a market-rate management salary. SDE does not. The two get conflated in conversation constantly, which is exactly why the first question to ask about any earnings number is: "what does this assume about management pay?"
The buyer pool decides. If your realistic buyers are individual operators, expect SDE pricing. If a management layer lets investors own the business without running it, expect EBITDA pricing — and expect sophisticated buyers to build both cases before they make an offer.
Nothing on this page is an appraisal, a broker price opinion, or an opinion of value for any specific business, and no statement here is a commitment that any business will sell at any particular price or multiple. Ranges describe commonly observed market patterns and individual results vary widely. Nothing on this page is legal, tax, or financial advice; consult your own advisors.
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