When you look at a business for sale, one number sits behind the asking price: its earnings. But there are two common ways to measure it, and mixing them up can cost you.
What is SDE?
Seller’s discretionary earnings (SDE) is the total financial benefit one owner-operator gets from the business. Start with net profit, then add back the owner’s salary, interest, depreciation, taxes, and one-off or personal expenses run through the company.
What is EBITDA?
EBITDA is earnings before interest, taxes, depreciation and amortization. Unlike SDE, it assumes the business pays a market-rate salary to a manager. It suits larger companies that run without the owner.
Which should you use?
- Owner-operated businesses (a cafe, a cleaning company, a small contractor) are usually priced on SDE.
- Businesses with a management team are usually priced on EBITDA.
The catch when you finance it
SDE includes the owner’s pay. If you will work in the business, that pay is your income, but a lender may want to see cash left over after a fair wage. Before you sign, ask what the business earns after paying you or a manager, and check that it still covers the loan payments.
Questions to ask the seller
- How was SDE calculated, and what was added back?
- Can you show the tax returns and bank statements that support it?
- How many hours does the owner work each week?
Want to see what a business would cost to finance?
Every listing has a Deal Check with the monthly payment and whether cash flow covers it.
This article is general education, not financial, legal or tax advice. Talk to a qualified accountant and lawyer before you buy, sell or invest.