One of the most common areas of confusion for business owners preparing to sell is understanding the difference between EBITDA, Adjusted EBITDA, and Seller’s Discretionary Earnings (SDE). These terms are often used interchangeably, but in practice they serve very different purposes.
The most important thing to understand is this: the earnings metric buyers rely on depends on how the business operates and who the likely buyer will be. Size matters, but structure and buyer type matter more.
Smaller, owner-operated businesses are most often valued using Seller’s Discretionary Earnings. As businesses grow and become less owner-dependent, buyers and lenders increasingly rely on adjusted EBITDA. Larger, professionally managed companies are typically valued using EBITDA. The appropriate metric depends on buyer type, management structure, and how the business will operate after the sale.
Buyers are not simply buying revenue, equipment, or potential. They are buying future cash flow and evaluating the risk of sustaining that cash flow.
EBITDA answers how profitable the business is as an operating company.
Adjusted EBITDA answers what the business earns on a normalized, repeatable basis.
SDE answers how much income a single owner-operator can reasonably expect to earn.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures operating profitability before financing and accounting decisions.
EBITDA is most relevant when the business has management in place, the owner is not essential to daily operations, and the buyer is a private equity group or strategic acquirer.
Adjusted EBITDA starts with EBITDA and removes non-recurring, non-operational, or discretionary items to reflect normalized ongoing earnings.
Common adjustments include one-time professional fees, unusual repairs, temporary expenses, excess owner compensation, and owner perks that will not continue after a sale.
Seller’s Discretionary Earnings represent the total economic benefit available to a single owner-operator.
SDE includes net income plus owner salary, payroll taxes, benefits, personal expenses, and one-time items. It answers the practical question: if I buy and run this business myself, how much money can I make?
There is no universal agreement on where one market category ends and another begins, but business size and structure influence how buyers evaluate earnings.
Owner-operated micro cap and Main Street businesses are typically valued using SDE. As businesses grow into the several-million-dollar range, both SDE and adjusted EBITDA may be relevant, particularly when SBA financing is involved. Lower middle market businesses, which can extend well into the tens of millions of dollars in enterprise value, are typically valued using EBITDA or adjusted EBITDA.
Metric |
Who Uses It |
Best For |
Primary Focus |
SDE |
Owner-operators, SBA buyers |
Owner-run businesses |
Personal income |
Adjusted EBITDA |
SBA lenders, PE, strategics |
Growing businesses |
Normalized earnings |
EBITDA |
Private equity, strategic buyers |
Larger companies |
Operating performance |
No. SDE includes owner compensation and discretionary expenses, while EBITDA assumes management compensation is an operating cost.
SBA lenders want to understand normalized cash flow available to service debt while accounting for management requirements and sustainability.
Yes. Many businesses can be evaluated using both metrics depending on who the buyer is and how the business will be operated after the sale.
As a business broker working with Ohio business owners, I frequently help clients understand which earnings metric applies to their business and how buyers and lenders will evaluate it.
If you are considering selling your business or planning for a future exit, a clear understanding of EBITDA, adjusted EBITDA, and SDE can materially impact value and deal certainty.
