When it’s time to sell your business, one of the first questions buyers ask is simple: How much money does it really make?
The answer isn’t always straightforward. Business buyers measure profitability in a few different ways, and two of the most important metrics you’ll hear are EBITDA and Seller’s Discretionary Earnings (SDE).
Both EBITDA and SDE, while reflecting your business’s earnings, narrate different financial stories. Grasping the relevance of each to your unique situation can significantly influence your business’s valuation, the range of potential buyers, and ultimately, the price you can command in the market.
EBITDA: The Metric That Tells Buyers How Strong Your Business Really Is
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
It’s a measure of your company’s core operating profitability, which is how efficiently your business runs, without factoring in financing choices, tax structure, or non-cash accounting items.
Buyers love EBITDA because it provides a standardized view of performance. It strips out variables that differ from one company to another, enabling them to make apples-to-apples comparisons across multiple opportunities.
EBITDA is most relevant for larger, scalable businesses, especially those with established management teams and minimal owner dependence. These companies attract institutional or strategic buyers, such as private equity firms or corporations, who are interested in cash flow consistency and growth potential.
In other words, EBITDA tells a buyer how strong and self-sustaining the business really is.
SDE: The Metric That Shows What an Owner Really Takes Home
Seller’s Discretionary Earnings (SDE), on the other hand, looks at profitability from an owner’s perspective.
It represents the total financial benefit an owner-operator receives from the business, including profit, salary, perks, and certain discretionary expenses that a new owner could remove or adjust.
For example, if you run personal vehicle costs, cell phone plans, or one-off travel through your business, add those amounts back to calculate SDE.
SDE is for smaller, owner-operated businesses that rely heavily on the owner’s day-to-day involvement. The goal is to answer the question: “How much money could a new owner expect to earn if they stepped into this role?”
Buyers who rely on SDE are typically individuals or small partnerships, rather than large investors. They’re looking for stability and lifestyle income rather than corporate scalability.
EBITDA vs. SDE: Which One Matters for You?
Both metrics are valid, but which one matters more depends on the size and structure of your business.
Think of it this way:
- EBITDA views your business as an investment.
- SDE views your business as a livelihood (job).
EBITDA is what sophisticated buyers use to assess long-term earning power and efficiency. SDE helps smaller buyers understand how much income they’ll actually take home after assuming your role.
If your business could run smoothly without you, EBITDA will likely be a key driver of your valuation.
If your presence is critical to daily operations, SDE paints a more accurate financial picture.
The key is to know which audience you’re selling to because presenting the wrong metric can turn serious buyers away or lower your asking price.
How to Make the Shift from SDE to EBITDA
As your business grows, it’s smart to start preparing for the next stage where buyers care more about systems than the owner.
That means transitioning your finances toward an EBITDA-style structure. Here’s how to start:
- Pay yourself a market-rate salary. Keeping your personal compensation consistent and easy to separate from the business’s actual performance makes analysis easier.
- Stop running personal expenses through the company. It may be tax-efficient now, but it makes valuation harder later.
- Adopt standardized financial reporting (like GAAP). Clean, comparable numbers help buyers trust your data.
- Delegate key responsibilities. Buyers pay more for companies that can operate independently of the owner.
Even if you’re not planning to sell immediately, these steps make your business more attractive and potentially more valuable when the time comes.
Avoid These Common Seller Mistakes
Many owners unknowingly reduce their valuation during the sale process simply by how they present their numbers.
Here are a few mistakes I see most often:
- Over-adjusting expenses to inflate SDE buyers’ notice erodes credibility.
- Mixing personal and business finances makes earnings appear less reliable.
- Failing to document “add-backs.” Clear records must support every adjustment.
- Assuming all buyers use the same valuation method. Private equity investors and individuals view businesses through very different lenses.
Buyers don’t just evaluate your profits; they assess your professionalism. Presenting well-organized, transparent financials can significantly increase your value by reducing perceived risk, empowering you to take control of the selling process.
How a Business Broker Helps You Get the Most from Your Numbers
Knowing whether to emphasize EBITDA or SDE is just part of the challenge. Properly presenting those numbers to buyers is just as important.
That’s where a skilled business broker, with their expertise and experience, adds real value, providing you with the reassurance and confidence you need during this crucial process.
A broker helps you:
- Normalize your financials so buyers can easily understand your actual earnings.
- Identify legitimate add-backs that strengthen your valuation.
- Position your business correctly based on the type of buyers it will attract.
The proper presentation builds confidence, reduces negotiation friction, and often leads to multiple qualified offers for a position every seller wants to be in.
Position Your Business for a Stronger, More Confident Exit
Both EBITDA and SDE tell a story about your profitability, but choosing the right one for your business depends on your size, structure, and target buyer.
If you’re thinking about selling in the next 12 to 24 months, now is the time to start aligning your finances with buyer expectations. Clean, consistent reporting not only makes your business easier to value but also to sell.
Ready to see how buyers would view your business?
Reach out to David Jacobs for a confidential valuation discussion and learn which metric best reflects your company’s true earning power.
