black and silver laptop computer
black and silver laptop computer

SDE and EBITDA are two commonly used terms when describing a business for sale and its financial operations. What exactly do these terms mean and how are they used?

Seller’s discretionary earnings (SDE) is used to measure the cash flow and earnings of an owner-operated business. It is calculated by adding back certain expenses to the net profit of the business. Expenses such as the owner’s benefits (salary), non-cash expenses, one-time investments and other non-related business incomes and expenses. SDE reflects the full financial benefit a business generates for its owner.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income. By stripping out the non-cash depreciation and amortization expense as well as taxes and debt costs, EBITDA attempts to represent cash profit generated by the company’s operations.

So, what is the difference between the two? In practice, not much. Both figures are representations of cash flows that the business generates for a hypothetical owner. Where the numbers have relevance is in their application. SDE is a more appropriate measure for small Main Street businesses whereas EBITDA is used in larger transactions. In the Business Brokerage realm, SDE and EBITDA can be treated as synonymous.