Key Takeaways
- Two metrics set your price: EBITDA (used by buyers like me) and SDE (used by brokers selling smaller owner-run companies). The gap between them is one line: owner compensation.
- EBITDA is your tax-return profit plus interest, taxes, depreciation, and amortization added back, then adjusted so a market-rate manager's salary stays as an expense.
- SDE adds back every dollar the owner takes out and does not replace it with a manager's salary. That's why SDE looks bigger but carries a lower multiple.
- Subtract a hired manager's cost from SDE and you arrive at the EBITDA a buyer will actually use, so honest valuations land close no matter which metric you start from.
- There is a third number below EBITDA: cash after the equipment spend required to stay the same size. That's what a buyer prices on.
- The owner-salary line and the cash-after-capex line are decided in your books years before any buyer shows up. Fix them and you change which buyer you attract.
Why two numbers decide your entire sale price
Your selling price is one of two numbers multiplied by a factor: EBITDA or SDE. Which one applies to your company is the first thing a buyer determines, and it decides whether you get an offer at all and from which type of buyer. Most owners spend years evaluating themselves by one of these numbers without knowing which one.
I run a private equity firm, and every company we bought was valued on one of these two metrics. The number a buyer multiplies is almost never the profit on your tax return. That return reflects your decisions about debt and taxes, so a buyer strips those decisions out before comparing your company to the others on their desk.
Throughout this article I'll use one example: a precision machining business with $6 million in revenue and $600,000 of profit on its tax return. By the end, that $600,000 will become several different numbers, and the price depends entirely on which one the buyer is looking at.
What EBITDA really means to a buyer
EBITDA is earnings before interest, taxes, depreciation, and amortization. In plain terms, it's what your company earns before four expenses that a buyer no longer carries once they become the owner. When a buyer reads your return, they're reading your choices, and they remove them.
Take our machining company. On $600,000 of profit, it paid $60,000 in interest, $40,000 in taxes, and wrote off $100,000 in depreciation on trucks and equipment. The interest goes back because loan size is the owner's choice and existing debt is paid off at closing out of the purchase price, so the new owner never carries it. The taxes go back because the buyer sets up their own tax structure the day they take over. Depreciation goes back because it writes off equipment whose cash already left the company in a prior year. Amortization is the same idea for intangible assets like a purchased customer list; this company doesn't have any.
Add those back: 600 + 60 + 40 + 100 = $800,000. That's EBITDA. It's the metric my side of the table uses, and it deliberately keeps two companies comparable even when one financed its trucks and the other paid cash. The financed owner simply repays that debt from sale proceeds, so they net less, but they were valued on the same number.
The one owner choice EBITDA does not erase: your salary
EBITDA does not add back the owner's salary the way it adds back interest or taxes, because EBITDA assumes someone has to be paid to run the company. A manager's salary is a real, ongoing expense, and in an owner-run business the owner's pay stands in for it.
So the buyer doesn't remove owner compensation entirely. They add back only the portion that exceeds what a hired manager would cost. An owner paying himself $300,000 for work worth $200,000 gets $100,000 added back; the other $200,000 stays as an expense. The adjustment also runs in reverse. Our owner pays himself just $80,000, which is below the roughly $200,000 a manager would cost. So the buyer adds the missing $120,000 as expense, and $800,000 drops to $680,000.
This is the point where an owner-run company and a manager-run company stop looking the same on paper. Even at identical EBITDA, the books show the owner chose to run it themselves, and the buyer mentally installs a $200,000 manager before doing anything else.
How SDE inflates the number and why the multiple drops
SDE, or seller's discretionary earnings, is the total cash an owner pulls out of the company in any form during the year. It's the metric brokers use to sell smaller, owner-run businesses, and it's just a simple way of saying how much the company pays the person who owns and runs it.
The whole difference from EBITDA is owner compensation. SDE adds back every dollar of it and does not substitute a manager's salary. Start again at $800,000 before the salary adjustment, where the owner's $80,000 is still an expense. The broker adds that $80,000 back. Then they add $50,000 the owner runs through the company for a personal truck and family phones, plus $30,000 from a one-time lawsuit that settled last year and won't recur. The same company is now presented at $960,000.
Here's the apparent contradiction: the broker's multiple is around 3x, lower than the multiple you hear for EBITDA. But take that $960,000 and subtract the $200,000 a hired manager would cost, and you get $760,000, which is close to the EBITDA a buyer like me would land on. It's a salary swap. Add the owner's pay back and the number rises while the multiple falls; leave the manager's salary in and the number falls while the multiple rises. Multiply $960K by 3 and $760K by 4, and as long as both sides are honest about the cost of an executive, the prices land close, because it's the same company.
The salary line is the buyer's first proof you're not the business
The buyer scans your books for the salary a hired manager would earn because it's their first evidence the company can run without you. A business that only produces its results when the owner works for $80,000 is a business the buyer must staff with a manager from day one.
That's why the metric applied to you is really decided by your own reporting. Take our company as it stands today: no manager, owner doing the work for $80,000. A fair figure is the SDE of $960,000, valued by a buyer who plans to sit in the chair themselves, at a multiple around 3x, because they're paying for a job as well as a company.
Now change the setup. Hire a manager at $200,000, stop paying yourself the $80,000, and run it that way for a year or two. Tax-return profit drops and you may feel poorer, but the company now earns $680,000 on its own, and after adding back the truck, phones, and lawsuit the buyer arrives at about $760,000 with no doubt about who's in control. That's exactly what a buyer values on EBITDA, and it's where multiples start to climb, because larger, owner-independent companies attract larger buyers who pay more. Your reporting made that shift from SDE to EBITDA years before any buyer did.
The third number: cash after the equipment you can't skip
Below EBITDA sits the number I actually check before multiplying anything: the cash left after the equipment spend required just to keep the company the same size. EBITDA can show profit that isn't really cash, and that's the difference between an offer and a walk-away.
I once looked at a manufacturer showing $5 million in EBITDA. I liked the business and had already sketched out the first year. Then the numbers showed it needed $3 million a year in new machines just to stay the same size, leaving roughly $2 million in real cash. I priced it on $2 million, the price only worked if you believed in $5 million, and I passed. Cash told me something EBITDA couldn't.
Back to our company at $760,000 EBITDA. It spends about $150,000 a year on trucks and equipment just to stay afloat, so the cash it actually generates is $610,000. Two companies at $760,000 EBITDA, one spending $150,000 on equipment and one spending $50,000, are completely different to me. In equipment-heavy businesses some buyers go all the way to EBIT, which counts depreciation as the real expense it is. Then comes the reliability question: is that spend 15% or 30% of revenue, and has the cash actually arrived or is it stuck in customer receivables? The more of your EBITDA a buyer has to take on faith, the less they'll credit.
Do the math tonight, in this order
To see your company the way a buyer does, work from the top down. Start with SDE: add back every dollar you take out of the company in any form. Subtract a market-rate CEO or manager salary, and you have EBITDA as the buyer sees it. Then subtract the equipment spend required to stay the same size, and you have the figure the buyer bases the price on.
If the top-executive salary is already reflected in your books and the cash after equipment is clear, I can value you without guessing. A buyer forced to guess will price on their guess, not your number, and that guess protects them, not you. Avoid presenting an EBITDA you can't back with cash, because the buyer's accountant will find the gap and it will come down to your reports either way.
Once you have that final number, all that's left is the multiplier. And the multiplier starts with what makes a buyer choose to acquire your company instead of building one from scratch. That's the next thing to understand before your first buyer call.
The Bottom Line
Your sale price is one number multiplied by a factor, and which number applies is decided in your books, not in a negotiation. EBITDA and SDE describe the same company and the same cash; the difference is whether the owner's salary is added back or replaced by a manager's. If you can show a buyer a profit figure that exists without you, backed by real cash after required equipment spending, you get valued on EBITDA and attract larger buyers at higher multiples. If you can't, your price is just payment for work the buyer plans to do themselves.
Book a Free Strategy Session →Frequently Asked Questions
What is the difference between EBITDA and SDE?
EBITDA is earnings before interest, taxes, depreciation, and amortization, and it keeps a market-rate manager's salary in as an expense. SDE, seller's discretionary earnings, adds back every dollar the owner takes out and does not replace it with a manager's salary. The entire gap between the two metrics is owner compensation.
Why does SDE show a bigger number but a lower multiple than EBITDA?
SDE adds the owner's full pay back, which inflates the number, so it carries a lower multiple to compensate. EBITDA leaves a manager's salary as an expense, producing a smaller number with a higher multiple. It's a salary swap: subtract a hired manager's cost from SDE and you arrive at EBITDA, and honest valuations land at similar prices either way.
How do buyers treat the owner's salary when valuing a business?
Buyers only add back the portion of owner pay that exceeds what a hired manager would cost. If you overpay yourself, the excess is added back; if you underpay yourself, the shortfall is subtracted so a market-rate salary sits in the books. This line is the buyer's first proof the company can run without you.
Which valuation metric will apply to my company?
Smaller, owner-run companies are typically valued on SDE by brokers, while buyers like private equity firms value companies on EBITDA once the business can operate without the owner. Your own reporting decides which one applies, mainly through the executive-salary line. Installing a manager and letting the company perform without you shifts you from SDE to EBITDA.
Why isn't EBITDA the final number a buyer uses?
Because EBITDA can show profit that isn't real cash. A buyer subtracts the equipment spending required just to keep the company the same size, arriving at cash flow. Two businesses with identical EBITDA are very different if one needs far more capital reinvestment to sustain it.
How can I calculate the number a buyer will price my business on?
Start with SDE by adding back every dollar you pull from the company in any form. Subtract a market-rate CEO or manager salary to get EBITDA, then subtract the equipment spend needed to stay the same size. The result is the cash figure a buyer bases the price on before applying a multiple.
