Guide
SDE vs EBITDA: a worked example
Same books, two numbers, two kinds of buyer.
Seller’s discretionary earnings (SDE) and earnings before interest, taxes, depreciation and amortization (EBITDA) start from the same books but answer different questions. SDE asks what one owner-operator takes home. EBITDA asks what the business earns with a paid manager in your seat.
Example only. Pretend numbers for a one-owner commercial cleaning company. No multiples or prices.
From net income to SDE
| Pre-tax net income | $180,000 |
|---|---|
| + Owner’s salary | $120,000 |
| + Owner’s vehicle and phone | $15,000 |
| + Interest | $10,000 |
| + Depreciation | $25,000 |
| + One-time legal fee | $8,000 |
| SDE | $358,000 |
Each add-back is a cost a new owner wouldn’t have, or one that was a one-off. Every one needs paper behind it. Add-backs without proof are where buyers and lenders cut the price.
From SDE to adjusted EBITDA
| SDE | $358,000 |
|---|---|
| − Market wage for a general manager | ($95,000) |
| Adjusted EBITDA | $263,000 |
A buyer who will run the business themselves looks at the $358,000. A buyer who will hire a manager, like a private equity group, looks at the $263,000. Same company, two honest numbers. Know which one your buyer is using.