SDE OR EBITDA
HOW DO THEY DIFFER
SDE is Seller’s Discretionary Earnings, while EBITDA refers to Earnings Before Interest, Taxes, Depreciation and Amortization.
Why do we care? SDE is more relevant for a buyer who will be the single owner-operator. It reflects the cash available to a buyer. SDE is a key metric for a smaller sized transaction (Main Street Deal). The calculation starts with net income and adds back EBITDA plus the owner’s salary and personal perks (e.g. company car, life insurance, etc.). Typical multiples are 2 to 4 x SDE.
On the other hand, EBITDA reflects operational performance of the business. It is the metric used by strategic investors and Private Equity. Key adjustments or add backs to EBITDA include:
- officers’ compensation in excess of reasonable compensation for a manager(s)
- over market rental rate for real property
- excess family members’ salaries
- personal costs, such as health, entertainment and defined benefit contribution
- stock-based compensation
- home expenses
- professional advisor fees
EBITDA is important for amounts in excess of $2 million. Multiples start at 4x and increase based on revenues, profits and operational efficiencies.