EBITDA vs SDE: Which Should You Use When Buying a Small Business?
EBITDA and SDE are both used to value small businesses — but they measure different things. Using the wrong one inflates the multiple and overstates financing risk. Here's when to use each.
When evaluating a small business acquisition, the single most important number is the earnings figure used to set the purchase price. Use the wrong metric and you'll either overpay, miscalculate the DSCR, or compare apples to oranges across deals in different categories.
The two metrics you'll encounter are EBITDA and SDE.
What is EBITDA?
Earnings Before Interest, Tax, Depreciation, and Amortisation.
EBITDA strips out financing costs, tax obligations, and non-cash accounting charges to reveal the operating cash-generating ability of the business, independent of how it is financed or taxed.
EBITDA = Revenue − Operating Expenses (excl. interest, tax, D&A)
EBITDA is the standard metric for:
- Businesses with $2M+ in revenue
- Businesses with professional management in place
- Multi-location or scalable businesses
- Businesses where the owner is not the operator
What is SDE?
Seller's Discretionary Earnings.
SDE is used for owner-operated small businesses where the owner works in the business full-time and compensates themselves from the P&L. SDE adds back the owner's salary, personal expenses run through the business, and one-off costs to arrive at the total economic benefit available to a working owner-operator.
SDE = EBITDA + Owner Salary + Owner Benefits + One-off / Non-recurring Items
SDE is higher than EBITDA for the same business. It is the correct metric when:
- The owner works full-time in the business
- Revenue is under ~$2M
- The buyer intends to work in the business themselves (owner-operator acquisition)
Why the distinction matters
For valuation: Industry multiples are quoted against a specific earnings base. A café "selling for 2x" means 2x SDE, not 2x EBITDA. A consulting firm "at 4x" means 4x EBITDA. If you compare the café to the consulting firm using inconsistent metrics, the comparison is meaningless.
For financing (DSCR): This is where mistakes can be expensive. Your acquisition loan is repaid from actual cash flow — not from the theoretical SDE add-back.
If the seller's salary is $80,000 and that gets added back to arrive at SDE, remember: when you take over, you either: a) Pay yourself $80,000 (which means that cash is not available for debt service), or b) Work for free (which has its own problems)
Critical rule: When calculating DSCR for owner-operated businesses, use SDE but subtract a market-rate salary for the role you will fill. The remaining earnings are what actually services the debt.
Practical example
A café has:
- Revenue: $600,000
- EBITDA: $60,000
- Owner's salary (added back): $70,000
- Owner's personal car (added back): $8,000
- SDE: $138,000
The business is listed at $280,000 (2x SDE).
If you buy it and plan to work full-time as the operator, your "real" earnings for DSCR purposes = SDE minus what you'd need to pay someone to do your job. If a manager earns $65,000, your adjusted earnings for DSCR = $138,000 − $65,000 = $73,000.
At 60% LTV on $280,000, your loan is $168,000. At 8.5% over 7 years, annual debt service ≈ $33,000. DSCR = 73,000 ÷ 33,000 = 2.2x — workable.
But if you naively used SDE = $138,000 for DSCR: 138,000 ÷ 33,000 = 4.2x — wildly optimistic and wrong.
When to use each: summary
| Use SDE when... | Use EBITDA when... | |-----------------|-------------------| | Owner-operated business | Professionally managed business | | Revenue under ~$2M | Revenue over $2M | | Buyer plans to operate the business | Buyer wants passive/semi-passive income | | Industry benchmarks are quoted as SDE multiples | Industry benchmarks are quoted as EBITDA multiples |
How BAS Tool handles it
BAS Tool accepts both EBITDA and SDE. When SDE is selected, it surfaces a note reminding you that margins will appear higher than EBITDA-based industry benchmarks — so you can calibrate the Financial Quality score correctly.
The DSCR calculation uses whichever earnings figure you enter — so make sure you input the right one for how you plan to run the business.
Evaluating a business and not sure which earnings metric to use? Try the free BAS calculator and see how EBITDA vs SDE changes the score.
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