SDE vs EBITDA: which profit figure a buyer should trust

Neither SDE nor EBITDA is the trustworthy one. They are answers to two different questions about who does the work in a business, and a seller can make either figure look larger simply by choosing which one to quote. The two are related by a single adjustment: one owner's pay. Once you know which figure you are looking at, and what it assumes about who runs the business after you buy it, converting between them is arithmetic, not guesswork, and the comparison stops being misleading.

Two definitions, one difference

Both figures start in the same place: the profit and loss account.

EBITDA adds back interest, tax, depreciation and amortisation to net profit. The International Business Brokers Association, the trade body for business brokers across North America, defines it plainly as "earnings of a business prior to interest (expense or income), income taxes, depreciation and amortisation expenses" (IBBA glossary). It assumes the business already pays someone a market wage to run it, because that cost is left in.

SDE takes the same four adjustments and goes one step further. The IBBA defines seller's discretionary earnings as the earnings of a business "prior to income taxes, non-operating income and expenses, nonrecurring income and expenses, depreciation and amortization, interest expense or income, one owner's entire compensation, including benefits and any non-business or personal expenses paid by the business" (IBBA glossary). SDE assumes the opposite of EBITDA: that you, the buyer, will do the owner's job yourself, so that cost comes out too.

Strip away the shared adjustments and the whole difference between the two is one line: whether the person who runs the business gets paid for it before you calculate the profit. The British Business Bank's explainer on EBITDA makes the same point from the other direction: EBITDA is useful for comparing operating profitability, but it is not a substitute for reading the accounts behind it, and that is exactly as true of SDE.

The bridge between the two figures

Because the only real difference is the owner's pay, you can move from one figure to the other with addition, not opinion.

The figures below are an illustration built for this article, not a real business.

Same business, two legitimate numbers, £55,000 apart. EBITDA says this is what the business earns with someone paid to run it. SDE says this is what it earns for one owner-operator doing that job themselves and keeping the difference. Neither number is wrong. Using the wrong one for your situation is where the mistake happens.

Why the label changes the price, not just the arithmetic

A multiple is only meaningful once you know what it is a multiple of; what a valuation multiple really means covers how the market prices durability of profit. Apply a "typical" multiple that was calculated against EBITDA to a figure that is actually SDE, and the business looks far cheaper than it is, because SDE already contains the cost of your own labour.

Which figure a listing uses is mostly a matter of convention, not choice, and the convention tracks size. The IBBA and M&A Source's quarterly Market Pulse Survey, compiled from hundreds of business brokers and M&A advisors, splits the market into "Main Street" deals valued at $0 to $2 million and the "lower middle market" from $2 million to $50 million (IBBA and M&A Source, Market Pulse Survey Q1 2026). Below that rough line, where the owner is usually still doing the job, SDE is the customary figure. Above it, where a manager is typically already on the payroll, EBITDA takes over. That is a US convention, built around US "Main Street" brokerage, but the question behind it is universal: who is currently being paid to run this business.

UK listings rarely use the term SDE at all. A small, owner-run UK business is more commonly priced on an "adjusted" or "normalised" EBITDA, even where adding back the owner's own salary is one of the adjustments inside it. The label differs by market; the underlying question, what would it cost to replace the owner, does not. Our guide to reading a business-for-sale listing covers how both labels turn up in practice and what to check regardless of which one a seller uses.

Where mixing them up costs real money

Three ways this goes wrong in practice:

• Comparing across measures. A seller quotes a multiple of SDE. You compare it with "businesses in this trade typically sell for four times EBITDA" and conclude the asking price is low. The two multiples were never describing the same thing.
• Double counting. You buy a business on SDE, correctly understanding that the figure already assumes you do the owner's job. A year later you hire a manager so you can step back, and forget that this cost was never budgeted into the price you paid.
• Add-backs that are not about the owner at all. A schedule that converts net profit into an adjusted figure can include genuine owner's pay alongside one-off legal costs, a family member's salary, or discretionary perks that have nothing to do with who runs the business. Our due diligence checklist sets out how to test each add-back for evidence before you accept it as part of either figure.

What to do before you trust either number

• Ask for the reconciliation, not the label. Whatever figure a seller or broker quotes, ask to see it built up line by line from net profit, with an invoice or payslip behind every addition.
• Convert before you compare. If one multiple is built on SDE and another on EBITDA, put them on the same basis before deciding which business looks cheaper.
• Price in your own plan. If you intend to run the business yourself, SDE is the more honest figure to buy on, because you are the cost it already removed. If you intend to install a manager, subtract a realistic market salary for that role, not the current owner's pay, before you multiply anything.
• Get a second opinion before you commit to a number, not after. That is a large part of what the Republic of Investors community exists for.

Common questions

Is SDE the same as adjusted EBITDA? No. Both start from EBITDA and add things back, but SDE specifically adds back one owner's entire compensation, while an "adjusted EBITDA" figure assumes someone is still being paid to run the business and strips out other one-off or non-operating items instead. Ask exactly what was added back before treating the two as interchangeable.

Which figure is higher, SDE or EBITDA? For an owner-operated business, SDE is equal to or higher than EBITDA, because it contains every adjustment in EBITDA plus the owner's pay on top. If an owner already draws no salary, or draws a market-rate salary that has not been added back anywhere, the two figures converge.

Can I turn SDE into something closer to EBITDA myself? Broadly, yes, and it is a better test than trusting either label. Subtract a realistic market salary for whoever would actually run the business day to day, not the current owner's pay, and use that adjusted figure to judge what the business can support.

Why do UK listings rarely use the term SDE? SDE is largely American and Canadian broker language, developed for the "Main Street" segment of business-for-sale listings. UK advisers typically describe the same adjustment, adding back the owner's own pay, as part of an "adjusted" or "normalised" EBITDA instead.

Does it matter which figure a lender uses? Yes. A lender financing the purchase underwrites its own view of what the business can support, including the cost of replacing any work you will not personally do, and will test whichever figure a seller quotes rather than accept it on sight. Do not assume the number in a listing is the number a lender will fund against.