SDE vs EBITDA: What’s the Difference in Business Valuation? - Small Business Valuation Guide

When determining what your business is worth, two terms often come up: SDE (Seller’s Discretionary Earnings) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

SDE vs EBITDA: What is the Difference in Business Valuation?

Both are used in business valuation methods, but they serve different purposes depending on the size, structure, and goals of the valuation. Choosing the right one can make a major difference in your company valuation—especially if you’re preparing for a small business appraisal or working with a professional business appraiser.

Let me break down the differences, when to use each, and how they can affect how much your business is worth.

What is SDE in Business Valuation?

SDE business valuation is the most common approach for small business valuation, particularly when the owner is heavily involved in day-to-day operations. SDE starts with the business’s net income and adds back:

• Owner’s salary and benefits

• Discretionary expenses (e.g., personal travel or vehicle expenses)

• Non-cash expenses (like depreciation)

• One-time or non-recurring expenses

This gives a clear picture of total owner benefit—what a single, full-time owner/operator could expect to take home annually.

When to Use SDE:

• Small, owner-operated businesses (retail shops, service businesses, auto repair shops, HVAC companies, etc.)

• When the buyer will replace the owner in operations

• For valuations under $5 million in revenue

What is EBITDA in Business Valuation?

The EBITDA valuation method is more common for medium to large companies or businesses with a professional management team already in place. EBITDA removes the influence of financing, accounting, and tax decisions to reflect the company’s core operating performance. It’s often used by private equity firms, institutional buyers, and in market-based business valuations.

When to Use EBITDA:

• Larger companies or those with multiple locations

• Businesses where the owner is not essential to daily operations

• Situations where the goal is to compare performance across industries

Factor	SDE	EBITDA
Best For	Small, owner-operated businesses	Mid-size to large companies
Adjustments	Adds back owner’s salary, depreciation, interest, personal expenses, and one-time costs	Removes interest, taxes, depreciation, amortization
Reflects	Total financial benefit to a single owner	Operational profitability regardless of ownership
Common Use Case	Small business sales, how to value a small business	Mergers, acquisitions, private equity investment
Valuation Multiple	Typically lower (2–4x SDE)	Typically higher (4–8x EBITDA)

How SDE and EBITDA Affect Company Valuation

Because SDE adds back personal and discretionary expenses, it typically produces a higher earnings figure than EBITDA. This can increase the business appraisal value for an owner-operated company.

However, using EBITDA for a small business can undervalue it if those discretionary expenses are not added back. Likewise, using SDE for a large company with professional management may overstate value.

This is why a certified business valuation expert chooses the method based on the business type, size, and buyer expectations.

Example: Small Business vs Larger Company Valuation

• Auto Repair Shop Valuation (Small Business)

  • Annual Net Income: $200,000

  • Add-backs (owner salary, personal expenses, non-recurring costs): $100,000

  • SDE = $300,000 × industry multiple (3x) = $900,000 estimated value

• Manufacturing Business Valuation (Larger Company)

  • Annual EBITDA: $1.2 million

  • EBITDA multiple (6x) = $7.2 million estimated value

When Selling a Business, Which Should You Use?

If you’re preparing to sell, the choice of metric depends on:

• Who your likely buyer is (individual owner-operator vs institutional buyer)

• Your role in the business (hands-on vs absentee owner)

• Industry norms (some industries always use one method over the other)

For example:

• Retail business valuation → Often SDE-based

• E-commerce business valuation → Can use SDE or EBITDA depending on scale

• CPA firm valuation → Often EBITDA-based

How to Determine the Right Approach

1. Work with a Professional Business Appraiser – An accredited business valuation firm can prepare a business valuation report that’s defensible in negotiations, court, or with the IRS.

2. Understand Buyer Expectations – A business broker near you can provide market insight.

3. Compare Multiple Methods – Using SDE, EBITDA, and even discounted cash flow business valuation can provide a value range.

My summation...

Whether you use SDE or EBITDA in business valuation can dramatically affect how much your business is worth. For small, owner-run companies, SDE often tells the most accurate story. For larger, professionally managed businesses, EBITDA is the standard.

The best choice depends on your business size, structure, and the purpose of the valuation—whether it’s for selling a small business, partner buyout, succession planning, or business valuation for retirement.

Ready to find out which method fits your business? Contact Business Valuation Solutions today to get a clear, accurate, and defensible estimate of your company’s value.