SDE vs EBITDA: what is the difference, and when do brokers use each?

SDE vs EBITDA in one paragraph

SDE answers "how much total benefit does one owner-operator get from this business?" EBITDA answers "how much operating earnings does this business produce for an investor who hires a manager?" The measures overlap but differ mainly in how they treat the owner's pay. Which one a broker uses depends on the size and structure of the company, and buyers and lenders may have preferences of their own.

Side-by-side comparison

Neither measure is a standard accounting figure under GAAP, so definitions of add-backs matter more than the label. Both should be agreed in writing in an engagement, a confidential information memorandum or a letter of intent.

How SDE is built

A common outline brokers use is:

1. Start with pre-tax net income.
2. Add interest, depreciation and amortization.
3. Add one owner's total compensation and benefits.
4. Add discretionary or personal expenses run through the business.
5. Add one-time or non-recurring costs, and subtract one-time gains.

Each add-back must be documented, because a buyer's accountant will test every line.

How EBITDA is built

EBITDA starts at the same place but does not add back the owner's full compensation. Instead, advisors normalize the cost of the management role to what a hired executive would cost, then adjust for one-time and non-operating items. The result is often called adjusted EBITDA. It shows what a buyer should expect from the business without relying on the current owner.

When brokers switch from SDE to EBITDA

These are rules of thumb, not cutoffs, and no single number decides the answer. A 60-person business with an engaged owner may still be marketed on SDE if buyers are owner-operators. A broker's valuation judgment should come from the engagement and comparable transactions, not from this table.

Where one-time data license income fits

A company that licenses its operational records may receive a one-time payment. For valuation, that payment is generally a non-recurring item, so advisors normally show it separately from run-rate earnings and describe it in the add-back schedule or notes. Whether it is treated as income, a gain or something else in the financial statements depends on the contract terms and the company's accountant, so the seller's CPA should decide the presentation. It should not be annualized into the multiple unless the facts support repeat payments, and a company should not assume repeat deals.

This is the same discipline brokers already apply to one-time settlements or asset sales. The point for a client: a license can add proceeds around a transaction, not a higher earnings run-rate.

Practical use for a business broker

SourceX works with companies that have 50+ full-time employees at peak (contractors excluded), and some of those clients may be presented on adjusted EBITDA while others are marketed on SDE. Either way, the pre-market period is a natural moment to ask about data. The referral opportunities for business brokers page covers roles and moments, and the exit readiness guide shows where record history sits in preparation. Raise the topic before the confidential information memorandum is finalized so the presentation of any license is settled with the owner's CPA and counsel early. Working with the fractional COO or finance lead can also help to document systems, and a double opt-in introduction keeps the owner in control of who contacts them. For the structure of search-fund buyers, see the ETA explainer.

What brokers do and do not do in a referral

Partners introduce the company and give basic fit information. They do not export, upload or describe confidential records, and nothing is binding until the company agrees price and terms and signs. Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. The reward is paid only after the buyer pays and SourceX receives its fee; an introduction, meeting or signed agreement alone does not trigger payment, and no reward is guaranteed. If you hold a securities or other professional license, check your own rules on referral fees and disclosure before accepting any reward.

Questions to ask the owner before choosing a measure

• Is the owner paid a market salary, or is the pay above or below what a hired manager would cost?
• Which personal or one-time expenses run through the business, and can each be documented?
• Who is the likely buyer: an individual operator, a search-fund buyer or a financial sponsor?
• Does the owner plan to stay on after a sale, and in what role?

Mistakes to avoid

Next step

Ask clients with 50+ full-time employees at peak whether anyone has looked at the value of their record history, then register as a partner to make the introduction. The who qualifies page has the full baseline.