SDE vs EBITDA: Which Number Prices My Company?

Two Ways to Answer the Same Question

Every buyer is trying to figure out one thing: how much money this company really makes, and how many years of that money they are willing to pay for today.

Your tax return rarely answers that cleanly. It is built to keep your tax bill low, so it carries your salary, your truck and other choices a new owner might make differently.

SDE and EBITDA are two ways of cleaning up those numbers. They start in the same place and end at different points, and the difference between them is mostly about you.

What SDE Measures

Seller's discretionary earnings, often called owner's cash flow, adds up everything a single working owner takes out of the company in a year: pay, perks and profit.

You start with net profit, then add back your own salary, the perks the company pays for you, interest, depreciation, amortization and any true one time costs. What is left is the money one working owner could take home.

SDE assumes the buyer will step into your chair and do your job. That is why it fits a company where the owner is still the general manager, the top salesperson or the person who signs every bid.

What EBITDA Measures

EBITDA stands for earnings before interest, taxes, depreciation and amortization. In a sale it is usually adjusted, which means it is cleaned up the same way SDE is, with one big exception.

EBITDA assumes someone is paid a fair market salary to run the company. The buyer is not planning to work there full time. They want to know what is left after every seat, including the top one, is filled at a normal wage.

That is the number investor groups, private equity firms and larger strategic buyers care about. If that is the kind of buyer you expect, our page on selling to private equity covers what they look for.

Which One a Buyer Will Use on Your Company

Size and your own role decide it. Main Street deals, up to about $2 million in price, are usually asset sales priced on SDE. Larger companies are usually priced on EBITDA and more often sell as stock sales.

The line is not exact. A company where you still run every job site may be priced on SDE even at a good size, while a smaller one with a general manager in place may be judged on EBITDA.

A fair test is to ask yourself who would replace you. If the honest answer is the buyer, expect SDE. If the answer is a manager the buyer will hire, expect EBITDA.

• Owner works in the business daily and holds key relationships: SDE
• Owner has stepped back and a paid manager runs operations: EBITDA
• Buyer is an individual using an SBA loan: usually SDE
• Buyer is a fund or a larger company adding you on: usually EBITDA

A Worked Example With Round Numbers

This is a made up example. The figures are round on purpose so the math is easy to follow. They do not describe any real company or any typical result.

Say a Charlotte service company has $3,000,000 in yearly sales and reports $250,000 in net profit before taxes. Here is what sits inside that profit:

• Owner salary: $150,000
• Owner health insurance and vehicle paid by the company: $30,000
• Depreciation: $40,000
• Interest on an equipment loan: $20,000
• A one time legal bill from a settled dispute: $10,000

Add all of that back to the $250,000 profit and SDE comes to $500,000. That is what one owner working full time could take out of this company in a year.

Now assume a buyer would need to hire a general manager to do the owner's job, and the going rate for that role, with payroll taxes and benefits, is $120,000. Subtract that from SDE and adjusted EBITDA is $380,000.

Same company, same year, two numbers that are $120,000 apart. The buyer then applies a multiple to whichever figure they use, so the gap grows with every turn of the multiple.

Why Your Salary Matters So Much in the Switch

The example shows the main thing owners miss. Your salary is fully added back in SDE, then a replacement salary is taken back out in EBITDA. If you pay yourself oddly, both numbers move.

Owners who pay themselves very little often think their profit looks strong. Under EBITDA, a buyer will charge a market wage for your seat anyway, so the low salary does not create value. It just moves cost around.

Owners who pay themselves well above market may be leaving value hidden. The extra pay above a fair manager wage is a legitimate adjustment under EBITDA and should be shown clearly.

Family members on payroll get the same treatment. If your spouse draws a salary but does not work in the business, that is an add-back. If your son runs dispatch for half the going rate, a buyer will raise that cost to market.

Add-Backs That Hold Up and Ones That Don't

An add-back is a cost on your books that a new owner would not carry, or a cost that will not happen again. Each one should be backed by a receipt, a statement or a clear explanation.

Common add-backs that buyers generally accept when they are documented:

• Owner salary and payroll taxes on it (fully under SDE, the excess over market under EBITDA)
• Owner health, life and auto costs run through the company
• Personal travel, club dues or phone lines paid by the business
• Interest, depreciation and amortization
• Clearly one time costs like a lawsuit, a move or a rebrand
• Pay to relatives who do no real work in the company

What does not count is just as important. Buyers find these in due diligence, and once they find one, they start doubting the rest of your numbers.

• One time income. Money from selling a truck, a piece of land or old equipment is not operating profit, even though it landed in the company account.
• Loan proceeds. A bank loan or line of credit draw is borrowed money, not earnings.
• Owner draws. Money you moved from the business account to your personal account is not extra cash flow on top of profit. It has to be recast properly or it gets counted twice.
• Unrecorded cash. Sales that never made it onto the books cannot be proven, so they cannot be priced. You only get paid for what your records show.

That last point about cash catches a lot of owners. Saving some tax by keeping income off the books can cost you several times that amount at the sale, because every missing dollar of profit is multiplied in the price.

Recast Before a Buyer Does It for You

Recasting means rebuilding three to five years of your profit and loss statements to show the company's real earning power, with every adjustment listed and explained. A good broker does this as part of a valuation.

Doing it early helps in two ways. You see your company the way a buyer will, and you have time to fix things, like raising your own salary to market or ending personal expenses run through the business.

It also keeps you in control of the story. A clean, documented recast leaves a buyer less room to come back late with a lower price, a topic our letter of intent guide picks up.

If you want to see how earnings turn into a price, our guide to what your business is worth covers multiples and the other factors buyers weigh.

The quickest way to know which number fits your company, and what it comes to, is to have someone recast your books. Start with our free, private valuation or call (704) 555-0187 to talk it through.