What is the difference between EBITDA and SDE?
The short answer
EBITDA is earnings after a market salary for the owner’s role. SDE — seller’s discretionary earnings — is EBITDA plus one owner’s full remuneration added back. SDE is therefore always the larger number, and the multiples applied to it are correspondingly lower. Comparing an SDE multiple to an EBITDA multiple is meaningless.
Why two measures exist
SDE assumes a buyer who will work in the business full time, so the owner’s wage is available to them as part of the return. EBITDA assumes a buyer who will employ a manager, so that wage is a real cost. Very small owner-operated businesses are commonly quoted on SDE; anything a passive or corporate buyer would purchase is quoted on EBITDA.
The multiples are not interchangeable
A business at 2.0× SDE and the same business at 3.5× EBITDA can be the same price. Because SDE is the larger earnings figure, its multiples are lower. Owners who read an American article quoting SDE multiples and apply them to their EBITDA — or the reverse — arrive at numbers that are wrong by a wide margin.
Australian practice leans to EBITDA
Most Australian SME valuations, and effectively all valuations for tax, court, finance or shareholder purposes, are prepared on normalised EBITDA. SDE appears mainly in small-business brokerage and in material imported from the United States, where it is the dominant convention for owner-operated businesses.
Only one owner’s wage comes back
A frequent error in SDE presentations is adding back the remuneration of two or three working owners. SDE adds back one full-time owner’s remuneration, because a single buyer can only fill one role. Any additional working owners must be replaced with employees and their cost stays in.
The numbers
The same business under both measures
A business with $2.6m of revenue, one working owner drawing $90,000 where the market cost of the role is $150,000.
Scroll the table sideways →
| Line | EBITDA basis | SDE basis |
|---|---|---|
| Reported net profit | $310,000 | $310,000 |
| Add back interest, depreciation, one-offs | +$70,000 | +$70,000 |
| Owner remuneration adjustment | −$60,000 to market | +$90,000 added back |
| Earnings measure | $320,000 EBITDA | $470,000 SDE |
| Typical multiple applied | 3.2× | 2.2× |
| Indicative enterprise value | $1.02m | $1.03m |
The two approaches should reconcile to a similar value. Where they do not, the usual cause is an SDE multiple borrowed from a different market or an EBITDA figure that never costed the owner’s role.
Caveats
Which measure applies to you
The right measure depends on who the likely buyer is, not on which produces a bigger number.
Who answered this
Prepared by the valuation team at Business Valuations Brisbane, the business valuation division of Asset Valuations Group. Every report we issue is signed by a Certified Practising Valuer of the Australian Valuers Institute. General information only — not advice on your specific circumstances.
- A single owner-operator buyer SDE is a reasonable framing, because the buyer genuinely gets the wage as part of their return.
- A corporate, investor or passive buyer EBITDA, because that buyer must employ someone to do the work and the wage is a real cost.
- Any tax, court or finance purpose EBITDA. Normalised EBITDA is the accepted basis in Australian professional practice for reports that will be reviewed.
- Comparing quoted multiples Always confirm which measure a quoted multiple applies to before using it. This is the single most common source of wildly wrong expectations.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
Last reviewed
Get your earnings measured on the right basis.
A free 15-minute call answers it for your business specifically. No obligation, and a fixed fee in writing if you go ahead.
1300 778 033