SDE, seller's discretionary earnings, is EBITDA plus one full-time owner's compensation and benefits plus documented add-backs, and it is used to value owner-operated companies. Adjusted EBITDA assumes management is paid at market rate and is used for companies with a management team. SDE is higher than EBITDA for the same company, so SDE multiples are lower than EBITDA multiples.
What SDE measures
SDE measures the total economic benefit one full-time owner-operator receives from the business: profit, salary, benefits, perks and non-recurring items added back. It answers the buyer's question: if I run this myself, what do I take home?
What adjusted EBITDA measures
Adjusted EBITDA measures operating earnings after paying a market-rate manager to do the owner's job, normalized for non-recurring items. It answers a different buyer's question: if I own this and someone else runs it, what does it earn?
Why the multiples differ
Because SDE is the bigger number, the multiple applied to it is smaller. Applying an EBITDA multiple to SDE overstates value, sometimes badly. Buyers know which number they are using; sellers should too.
The line between the two is roughly the point at which a buyer would need to hire a general manager. Below it, SDE. Above it, EBITDA. Many founder-led companies sit near the line and get both views.
How add-backs are tested
Every add-back must survive a buyer's quality-of-earnings review. Documented, recurring and reasonable add-backs stand. Undocumented perks, family payroll that will not leave, and one-time items that recur every year get removed, and the price moves with them.
