SDE and EBITDA: read the earnings behind the price.

Start by checking the label

Business listings may describe earnings using seller’s discretionary earnings, EBITDA, adjusted EBITDA or cash flow. Those labels do not always mean the same thing. Before comparing asking multiples, establish what the figure includes and how it was calculated.

What SDE aims to show

Seller’s discretionary earnings is commonly used when evaluating smaller owner-operated businesses. It often starts with profit and adds back items such as one working owner’s compensation, interest, taxes, depreciation, amortisation and supported discretionary or non-recurring expenses. The specific adjustments need to be explained and evidenced.

SDE can help a prospective owner-operator understand the earnings available before their own compensation and financing choices. If the buyer intends to hire someone to perform the seller’s work, the cost of that replacement must be considered.

What EBITDA aims to show

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It is often discussed for businesses with a management structure that continues after a sale. Adjusted EBITDA may include additional normalisations, but the definition and supporting calculations still matter.

Unlike an SDE presentation that adds back a working owner’s compensation, a management-run earnings picture should account for the cost of the roles needed to operate the company. Check whether compensation is at an appropriate level for the work involved.

Neither figure is the same as cash in the bank

Working-capital movements, capital expenditure, debt payments and taxes can affect the cash available after a purchase. An earnings measure is one lens on performance. It should be read alongside the balance sheet, cash-flow information and operating requirements.

Make comparisons consistent

• Compare the same earnings measure and reporting period.

• Review each adjustment and the evidence behind it.

• Understand the seller’s responsibilities and replacement costs.

• Check whether recent trading supports the historical picture.

• Read the asking price together with the proposed deal structure.

Clear labels make initial deal discovery more useful. Detailed calculations and supporting records belong in the subsequent information process, where buyers and their advisers can test the assumptions.