SDE vs EBITDA: which one values your business?
EBITDA and SDE both measure what a business earns before financing and accounting choices distort the picture. The difference that matters is a single line: SDE adds back the wage of one owner-operator, because a buyer who works in the business replaces that person, while EBITDA leaves that wage in the costs because it assumes someone is paid to do the job. Smaller owner-run businesses are usually quoted on SDE and larger, manager-run ones on EBITDA, but that dividing line is a market convention rather than a rule. Whichever figure you use, the multiple has to match it: applying an EBITDA multiple to an SDE figure overstates value.
By the bizflip team · Published 2 September 2026 · Facts checked 2 September 2026 · Sources listed below
Both figures answer the same question — what does this business actually earn? — for two different buyers. EBITDA describes what a business earns for someone who will pay another person to run it. SDE describes what a business earns for someone who will run it themselves. Nearly every other difference between the two follows from that.
What each figure is
- EBITDA — earnings before interest, tax, depreciation and amortisation. You start at net profit and add back interest (a financing choice), tax (a structure and timing outcome), and depreciation and amortisation, which business.gov.au describes as the process of offsetting an asset, or an intangible such as goodwill or intellectual property, over a period of time. What is left is meant to be a comparable measure of operating performance.
- SDE — seller's discretionary earnings. You start in the same place and make the same add-backs, and then also add back the total benefit flowing to one full-time owner-operator: their wage, the on-costs attached to it, and the personal expenses run through the business.
Neither figure appears as a line on your tax return or your profit and loss statement. Both are constructed, and both are only as good as the adjustments the person constructing them can evidence. In Australia you will also meet PEBITDA, or proprietor earnings, an owner-earnings measure that sits in much the same place as SDE, and other markets have their own labels for the same idea. Terminology varies between markets and between advisers; the underlying question does not.
The difference that matters is one owner's wage
An Australian valuation adviser frames the choice as a question about what the buyer is purchasing: an investment, or a job. A buyer purchasing an investment pays for an earnings stream that survives a change of management, and that points to EBITDA — the cost of management stays inside the cost base, because someone has to be paid to do the work. A buyer purchasing a job pays for a role plus whatever profit is left over, and that points to an owner-earnings measure such as SDE.
| EBITDA | SDE | |
|---|---|---|
| What it answers | What the business earns for an owner who does not work in it | What one full-time owner-operator gets from working in it |
| One owner-operator's wage | Stays in the costs | Added back in full |
| An owner paid above market rate | Only the excess over a market wage is added back | The whole package is added back |
| Likely buyer | An investor, a trade acquirer, or anyone who will hire a manager | An individual who will work in the business |
| Size of the resulting number | Lower | Higher, by roughly one owner's total package |
| Multiple that goes with it | Higher | Lower, because the earnings figure is bigger |
Which one applies to your business
The metric usually follows the buyer pool rather than the size of the business. Owner-operated businesses tend to be quoted on owner earnings, because the people bidding are underwriting their own income and workload. Businesses with a genuine management layer tend to be quoted on EBITDA, because the people bidding are underwriting a transferable earnings stream. The awkward cases sit in the middle: profitable small and mid-sized businesses that are still heavily dependent on the owner, where a buyer will want both an owner-earnings view and a costing of what replacing the owner would take.
Dollar cut-offs do get quoted, and they are conventions from market practice rather than anything in a standard. One United States brokerage states its rule of thumb plainly: most businesses under US$1 million in earnings are valued on seller's discretionary earnings, most at US$1.5 million and above on EBITDA, and businesses in between can use either. Read that as a description of where the buyer pool changes hands, not as a threshold that transfers to your own market: the figures are US dollars and US practice, and the earnings level at which the buyer pool changes differs by market and by industry. What decides the metric is structure rather than size. A business earning well below that band with a full-time general manager in place is an EBITDA business. A business earning well above it with the owner working six days a week is not.
A wrinkle that catches sole traders and partnerships
If you trade as a sole trader or sole proprietor, or in a partnership, there is usually no owner's wage in the accounts to add back: what the owner takes out is a drawing against profit rather than a salary. The Australian Taxation Office is explicit about the mechanism — as a sole trader you are the business owner and not an employee of your business, so you cannot pay yourself a salary or wage, and any nominal payment of one is treated as a distribution of profit; the same applies to a partner in a partnership. Labels and tax treatment differ from country to country, so confirm your own with your accountant; the arithmetic a buyer faces does not differ. Your reported net profit already includes the value of your own labour, uncosted.
A company that employs its own director is the opposite case: the wage sits in the accounts as an expense, so an SDE calculation adds it back and an EBITDA calculation leaves it there. Two businesses trading identically can show very different profit lines purely because of structure. That is one of the reasons a buyer normalises earnings before comparing anything, and why a profit figure quoted without saying how the owner is paid tells you almost nothing.
The add-back has to survive a buyer's question
The most common problem in owner-operated valuations is the owner adding back their entire wage without asking whether the buyer will have to replace some or all of that work after settlement. It overstates maintainable earnings, and it tends to surface during due diligence rather than before it — which is the expensive moment to find out.
The correction is a replacement salary analysis. Write down what the owner actually does week to week, map it to the roles the market would hire for, and price those roles at market rates. If the owner is the general manager, the lead salesperson and the estimator, replacing them may take more than one person or a larger package than the owner expects. Cost the package rather than the base wage. Employer on-costs — compulsory pension or superannuation contributions, employer payroll and social security taxes, paid leave, insurance and recruitment — sit on top of the salary and vary by country, so use the ones that apply where the business trades. In Australia, for example, an employer must pay superannuation guarantee contributions of at least 12% of an employee's ordinary time earnings from 1 July 2025, before any of the rest is counted.
Handled properly, the two routes tend to converge. An owner-earnings figure less a realistic replacement salary usually lands close to a properly adjusted EBITDA, because both are trying to reach the same defensible level of maintainable earnings from different starting assumptions. When they are far apart, one set of adjustments is doing work it cannot justify.
Never mix the figure and the multiple
SDE is the larger number for the same business, so it carries the smaller multiple. EBITDA is the smaller number and carries the larger one. Applying an EBITDA multiple to an owner-earnings figure is, as one Australian valuer puts it, among the fastest ways to overstate a value — and it is an easy mistake to make, because published multiples are quoted without always naming the earnings base they were measured against.
So when someone quotes you a multiple, the first question is which earnings figure it was measured against, and the second is whether that figure was normalised the way yours has been. Transactions priced on EBITDA and transactions priced on owner earnings both exist, and they cannot be compared directly until the earnings base is reconciled. Our guide to valuation multiples by industry sets out the Australian ranges and what moves them.
Working out your own figure
- Decide the buyer scenario first. Owner-operated or under management is the choice that determines the metric; picking the metric first tends to mean picking the flattering one.
- Pull the accounts a buyer will actually ask for. Business Queensland notes that a broker or valuer will ask to see five years of financial statements where possible, along with information on intangibles such as intellectual property, trade marks, goodwill and how the business compares to others on the market.
- List every adjustment alongside the evidence for it. A one-off legal bill with an invoice behind it is an add-back. A recurring cost you would rather not count is not.
- Price the owner's role honestly, including pension or superannuation contributions, employer taxes and the other on-costs that apply where you trade, and state which buyer scenario the earnings figure assumes.
- Sanity-check the inputs against published ratios for your industry and your market. For an Australian business the ATO publishes small business benchmarks drawn from tax data across more than 100 industries, which will tell you whether your cost and expense ratios are normal for your trade; elsewhere, ask your accountant or industry association what the equivalent benchmark is. Either way, get that reality check before anyone multiplies your ratios by anything.
- Have it reviewed. Business Queensland's advice is that buyers and sellers often hold different views of what a business is worth, and that a broker or professional valuer gives a more complete picture and can speed up negotiation.
None of this is tax or legal advice, and the right treatment of a particular add-back can depend on your structure and your circumstances. Your accountant is the person to confirm how your own numbers should be presented.
Sources
Every load-bearing claim in this guide, and where it comes from:
- business.gov.au defines depreciation as the process of offsetting an asset over a period of time, and amortisation as the process of offsetting assets such as goodwill and intellectual property over a period of time. — business.gov.au (Australian Government)
- Standard business valuation methods and the reasons owners value a business (financing, investors, sale). — business.gov.au (Australian Government)
- The ATO states: "If you operate as a sole trader, you are the business owner and not an employee of your business. This means you can't pay yourself a salary or wage. Any nominal payment of a salary or wage to you is considered a distribution of profit." The same treatment applies to a partner in a partnership. — Australian Taxation Office
- "The SG percentage is the minimum SG rate you must pay for each eligible employee. From 1 July 2025 this is 12% of their ordinary time earnings (OTE) for the quarter." — Australian Taxation Office
- Business Queensland: a business broker or financial adviser "will ask to see 5 years (if possible) of financial statements" and information on intangible assets including intellectual property, trade marks, industry outlook, comparison to similar businesses, goodwill and brand recognition; and "buyers and sellers often have different ideas about what a business is worth. It's therefore a good idea to engage a business broker or professional valuer" who can offer "a more complete picture of a business's value" and help "speed up negotiations". — Business Queensland (Queensland Government)
- Australian valuation adviser framing: EBITDA suits a business "under management, or close to it" with the buyer mindset "I'm buying an enterprise investment"; SDE measures "total benefit available to one owner-operator (owner pay + add-backs)" with the mindset "What can I earn if I step in?"; "If the buyer purchases an investment, they pay for an earnings stream that survives management changes... If the buyer purchases a job, they often pay for a role plus a residual profit stream"; the most common issue is "that the owner adds back their entire wage without considering whether the buyer will need to replace some or all of that labour after settlement", which "can overstate maintainable earnings and create a valuation gap during due diligence"; "Applying an EBITDA multiple to an owner-earnings figure is one of the fastest ways to overstate value"; and transactions "priced on EBITDA" and "priced on owner earnings" "can't [be] compare[d] directly unless you reconcile the earnings base". Its worked example shows owner earnings less a replacement salary landing close to adjusted EBITDA. — Expert Business Valuations (Australian industry adviser)
- US brokerage rule of thumb on which metric applies at which size: "Most businesses with $1.5 million in earnings or greater will be valued with a multiple of EBITDA"; "Most businesses under $1 million in earnings will be valued using seller's discretionary earnings"; "Businesses between $1 million and $1.5 million in earnings can use either valuation technique." Also: "SDE represents the entire financial benefit your business would provide to one full-time owner-operator"; "Adjusted EBITDA adds back any excessive owner's salary and benefits over what a manager would make"; and because SDE is higher, "normal SDE multiples are lower than EBITDA multiples". Figures are US dollars and US market practice. — MidStreet Mergers & Acquisitions (US industry blog)
- The ATO publishes small business benchmarks drawn from tax data across more than 100 industries, as a free tool for owners to compare their performance against others in the same industry. — Australian Taxation Office
Ready for your own number? The valuation calculator is free and ungated, and its methodology is public.