SDE vs. EBITDA: Which One Buyers Use

Two Metrics, One Question: What's My Business Worth?

If you're thinking about selling your business, you've probably seen two acronyms floating around: SDE and EBITDA. Both measure how much money your business actually makes. But buyers use them differently depending on the size of your business, and getting this wrong can cost you real money in a negotiation.

This comes from hundreds of real buyer-seller conversations we've helped happen on Rejigg. What we see consistently is a clear inflection point where buyer language shifts from SDE to EBITDA, and owners who understand that shift walk into conversations better prepared.

What Is SDE?

SDE stands for Seller's Discretionary Earnings. It's the total financial benefit that flows to a single owner-operator from running the business. Think of it as the answer to: "If I buy this business and run it myself, how much money ends up in my pocket?"

You calculate SDE by starting with your net income and adding back your salary, benefits, personal expenses running through the business, one-time costs, and non-cash charges like depreciation. Basically, you're reconstructing the full economic benefit the business provides to the person running it.

Here's a simplified example. Say your P&L shows $150K in net income. You pay yourself a $120K salary.

You run $20K of personal vehicle expenses through the business. You have $15K in depreciation and paid $10K for a one-time legal matter. Your SDE would be roughly $315K.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures the operating profitability of the business as a standalone entity, separate from whoever owns it.

The core difference: EBITDA assumes the business will need a paid manager to replace the owner. So unlike SDE, you don't add the owner's salary back. You're measuring what the business earns after paying someone to do what you currently do.

Using that same example, if your business needs a $120K manager to replace you, your EBITDA would be closer to $195K. Same business, very different number, depending on which metric you use.

When Does Each One Apply?

Here's the general rule: SDE is the standard for smaller, owner-operated businesses. EBITDA becomes the standard as businesses get larger and have professional management in place.

The dividing line isn't perfectly clean, but in the conversations we see on Rejigg, the pattern is consistent. Businesses with SDE under roughly $1M get valued on SDE. Once you cross into $500K+ EBITDA territory (which often corresponds to $1M+ SDE), buyers start framing everything in EBITDA terms.

Why? Because SDE assumes one person is going to buy the business and run it. That's the typical profile of a buyer for a $500K to $3M business. They're an individual, often using an SBA loan, planning to step into the owner's shoes.

Larger businesses attract a different buyer. Private equity groups, family offices, and strategic acquirers don't plan to operate the business themselves.

They're hiring a management team. For them, the owner's salary is just another operating cost that stays on the books. So they think in EBITDA.

The Inflection Point: Where Confusion Happens

The transition zone is roughly $750K to $1.5M in SDE. This is where owners run into trouble, because you might get some buyers talking SDE and others talking EBITDA for the same business.

Imagine you own a business doing $1.2M in SDE. You pay yourself $250K. Your EBITDA is around $950K.

An individual buyer using SDE at a 3x multiple values your business at $3.6M. A private equity buyer using EBITDA at a 4.5x multiple values it at $4.275M. Same business, two different framings, and a $675K gap.

The owner who understands both metrics can work this range and speak each buyer's language. The owner who only knows one number risks either leaving money on the table or confusing a buyer early in the conversation.

Rejigg's valuation calculator runs both metrics side by side so you can see where your business lands before a single buyer reaches out.

How Your Salary Factors In

Your compensation is the single biggest difference between SDE and EBITDA, and it's the thing owners most often miscalculate.

For SDE, everything you take out of the business gets added back. Salary, bonuses, health insurance, car payments, the country club membership, your spouse's phone bill that runs through the company. All of it. The buyer is saying, "I'll decide how to pay myself once I own this."

For EBITDA, your salary stays in as an expense. But here's what matters: buyers won't just accept whatever you currently pay yourself.

They'll estimate what a "market-rate manager" would cost to do your job. If you're paying yourself $400K but a competent GM costs $175K, a buyer using EBITDA will adjust your financials to reflect that $175K. That adjustment actually increases your EBITDA by $225K, which is good for your valuation.

The opposite is also true. If you've been paying yourself below market, say $80K when a replacement would cost $150K, an EBITDA buyer will adjust upward, reducing your EBITDA by $70K.

Which Add-Backs Apply to Each?

Both SDE and EBITDA use add-backs, but they overlap in some areas and diverge in others.

Add-backs common to both:

• One-time expenses (lawsuits, equipment that won't be replaced, moving costs)
• Non-recurring professional fees (rebranding, one-off consulting projects)
• Depreciation and amortization
• Interest on debt the buyer won't assume
• Above-market rent if you own the building and lease it to the business at inflated rates

SDE-only add-backs:

• Owner's salary and payroll taxes
• Owner's health insurance and retirement contributions
• Personal expenses running through the business (vehicles, travel, meals, memberships)
• Compensation to family members who don't actually work full-time

EBITDA adjustments:

• Owner's salary gets replaced with market-rate management cost (up or down)
• Redundant roles that exist because the owner wears multiple hats (if a buyer would consolidate them)
• Below-market salaries for key roles that would need to be corrected post-sale

The distinction matters. If you're preparing SDE, you want to document every dollar of personal benefit flowing through the business. If you're preparing EBITDA, you want to demonstrate what the business earns with proper management costs baked in.

How to Calculate Both for Your Business

Start with your tax returns or P&L for the most recent three years. Buyers want to see trends, not just a single year.

To calculate SDE:

1. Start with net income from your P&L
2. Add back your total compensation (salary, bonuses, distributions)
3. Add back personal expenses running through the business
4. Add back interest, depreciation, and amortization
5. Add back one-time or non-recurring expenses
6. The result is your SDE

To calculate EBITDA:

1. Start with net income from your P&L
2. Add back interest, taxes, depreciation, and amortization
3. Add back one-time or non-recurring expenses
4. Replace your actual compensation with a market-rate manager salary
5. Adjust for any below-market salaries in key roles
6. The result is your adjusted EBITDA

If your books are clean, this takes an afternoon. If your books mix personal and business expenses freely (which is common and nothing to be embarrassed about), expect it to take longer. Rejigg's QuickBooks integration pulls your financial data automatically and helps build a clean data room without manual spreadsheets.

How Buyers Talk About Each One Differently

The language buyers use tells you a lot about how they're evaluating your business. In conversations on Rejigg, the patterns are pretty clear.

SDE buyers ask questions like: "How many hours a week do you work?" and "Could I run this with one employee?" and "What would change if you stepped away for a month?" They're trying to understand the job they're buying, because they're buying themselves a job plus a business.

EBITDA buyers ask: "What does your management team look like?" and "What's your GM's tenure?" and "Walk me through your org chart." They're evaluating whether the business runs without any specific individual, including you.

Both types of buyers care about the same fundamentals. Revenue trends, customer concentration, recurring revenue. But how they frame the value conversation depends entirely on which metric they're anchoring to. Understanding what buyers actually care about helps you prepare for either conversation.

How to Prepare for Either Conversation

You probably won't know which type of buyer shows up first. The best move is to prepare both numbers and let the buyer tell you which lens they're using.

For SDE preparation:

• Document every personal expense running through the business, even the small ones
• Calculate your total compensation including all benefits, perks, and distributions
• Be ready to explain your day-to-day role in plain terms
• Know your hours per week and what tasks only you can do

For EBITDA preparation:

• Research market-rate salaries for a general manager in your industry and region
• Build an org chart showing who handles what
• Identify which of your responsibilities could be delegated and to whom
• If you already have a strong GM or ops manager, highlight that. It's extremely valuable to EBITDA buyers

For both:

• Three years of clean financials with add-backs clearly documented
• A clear explanation for any big swings in revenue or margins
• A data room with your documents organized and ready to share. Rejigg gives you a built-in data room where you control who sees what and when.

Owners who show up to buyer conversations with both numbers prepared, plus clear documentation of how they got there, signal competence. That builds trust, which moves deals forward faster.

What This Means for Your Valuation

The metric a buyer uses determines the multiple they apply, and the two scales are different.

SDE businesses typically sell for 2x to 4x SDE, depending on size, industry, growth rate, and how dependent the business is on the owner. A $500K SDE business might sell for $1.5M at 3x.

EBITDA businesses typically sell for 3.5x to 6x+ adjusted EBITDA. The multiples are higher because EBITDA buyers are paying for a business that runs independently, which is inherently less risky. A $1M EBITDA business at 5x sells for $5M.

This is why the transition zone matters so much. If your business is in that $750K to $1.5M SDE range, the choice of metric can swing your valuation by hundreds of thousands of dollars. Running your numbers through Rejigg's valuation calculator gives you a clear picture of where you fall on both scales before you start talking to buyers. It's free, and it uses real transaction data to generate your estimate.

Frequently Asked Questions

Is SDE or EBITDA better for valuing a small business?

SDE is the standard for most small businesses, especially those under $1M in earnings where the owner is actively running the operation. It captures the full economic benefit to an owner-operator, including salary and personal expenses, which gives a more complete picture of what the business is worth to an individual buyer.

At what size do buyers switch from SDE to EBITDA?

The transition typically happens around $1M in SDE or $500K+ in EBITDA. At that level, the buyer pool shifts from individual owner-operators to private equity groups and strategic acquirers who plan to install professional management. These buyers think in EBITDA because they're paying someone else to run the business.

Can the same business be valued using both SDE and EBITDA?

Yes, and if your business is in the transition zone ($750K to $1.5M SDE), you should calculate both. Different buyers will use different metrics. Having both numbers ready, with clear documentation of your add-backs, lets you speak each buyer's language and keeps negotiations grounded in facts.

Why is my EBITDA lower than my SDE?

EBITDA is almost always lower than SDE because it doesn't add back the owner's salary. SDE treats your compensation as a benefit to the buyer. EBITDA treats it as an operating cost (or replaces it with a market-rate manager salary). The gap between the two is roughly equal to what it costs to hire someone to do your job.

How do I know which add-backs are legitimate?

A legitimate add-back is an expense that won't continue under new ownership or doesn't reflect the true operating cost of the business. Your personal truck lease, your one-time lawsuit settlement, above-market rent on a building you own. Document each one clearly with supporting records. If you can't explain it in one sentence to a buyer, it's probably not a clean add-back.