Brokers quote SDE. Lenders and PE buyers underwrite to Adjusted EBITDA. They are not the same number — and the gap is usually the owner's paycheck.
The 30-Second Answer
Both SDE and Adjusted EBITDA are normalized earnings — net income with the noise stripped out (interest, taxes, depreciation, one-time items, personal expenses run through the business). They differ on exactly one question: does the owner's salary count as a return to the buyer, or as a cost the buyer has to replace?
- Seller's Discretionary Earnings (SDE) is what the business earns for an owner-operator. The owner's salary is treated as part of the buyer's return, because the buyer will be the one drawing it.
- Adjusted EBITDA is what the business earns as a standalone asset. The owner is replaced with a market-rate manager, and that manager's salary stays in as a real cost.
- The bridge in one line:
Adjusted EBITDA = SDE − market-rate manager compensation
Why It Matters: A Worked Example
A broker lists a business at "4× SDE of $500K = $2.0M asking." Sounds reasonable. Here's what's underneath:
- Owner currently pays themselves a $150K salary plus $30K in benefits and payroll tax.
- To replace the owner with a hired GM doing the same job: $120K all-in (per BLS / industry comp).
- Adjusted EBITDA = $500K SDE − $120K manager comp = $380K.
If you're an owner-operator planning to draw a paycheck, paying 4× SDE ($2.0M) can pencil. If you're hiring a GM and underwriting like a financial buyer, the same business at 4× Adjusted EBITDA is worth $1.52M — not $2.0M. The "multiple" only means something when it's attached to the right earnings number. Mixing them up is how first-time buyers overpay by 25–35% and don't realize it until year two.
When SDE Is the Right Number
You'll be the operator
You plan to work in the business full-time and draw a salary as part of your return on the deal.
Main Street size
Single-location businesses, typically under ~$1M in earnings, where one owner can run the whole operation.
SBA 7(a) deals
SBA underwriting for owner-operator acquisitions traditionally references SDE-style cash flow to the buyer.
BizBuySell-style listings
Broker listings on BizBuySell, BizQuest, and similar platforms almost always quote SDE — that's the language of the marketplace.
When Adjusted EBITDA Is the Right Number
You're hiring a GM
If you won't run the business day-to-day, the manager's salary is a real cost — not an add-back.
Lower-middle-market deals
Roughly $1M+ of earnings, where the business is too big for a single owner-operator and trades as an institutional asset.
Equity partners involved
PE, search funds, independent sponsors, family offices — every financial buyer underwrites to Adjusted EBITDA so multiples and IRR are comparable across deals.
Beyond SBA financing
Bank cash-flow loans, mezz, unitranche, and seller notes layered on top all underwrite to Adjusted EBITDA and a debt-service coverage ratio.
Competitive processes
When multiple buyers are bidding, the market converges on Adjusted EBITDA so bids are apples-to-apples.
Converting Between Them
Both numbers are produced by the same normalization exercise — they just stop one line apart. Walk it from the bottom of the income statement up:
Start with reported net income
The bottom line of the tax return or income statement, as filed.
Add back interest, taxes, depreciation, amortization
This gives you reported EBITDA — operating earnings independent of capital structure and accounting choices.
Add back non-recurring and personal expenses
One-time legal fees, owner's car, family on payroll doing nothing, vacation home run through the business — anything that won't transfer to the buyer. This gives you Adjusted EBITDA.
Add back the owner's full compensation
W-2 salary plus benefits plus the employer payroll-tax portion. This gives you SDE.
To go SDE → Adjusted EBITDA, subtract market-rate replacement comp
Determine what it would cost to hire a GM doing the owner's actual job, and subtract that. The result is Adjusted EBITDA.
The full reconciliation — Net Income → EBITDA → Adjusted EBITDA → SDE — is what a clean QoE report shows on the EBITDA bridge. Every adjustment between those lines should be itemized, supported by source documents, and categorized.
What Counts as Market-Rate Manager Comp
The owner's current salary is almost never the right replacement number — owners routinely under-pay or over-pay themselves for tax reasons. Use a defensible market benchmark:
- BLS Occupational Employment and Wage Statistics for the relevant SOC code and metro area (free, lender-friendly).
- Industry comp surveys from trade associations — often the most accurate for niche operator roles.
- Job-board comps for the actual posting you'd run to backfill the role.
Match the scope, not the title: an "owner" who is also the lead salesperson, head technician, and bookkeeper isn't replaced by one $90K GM. Either price in multiple hires, or be honest that this is an owner-operator deal and quote SDE. See owner compensation normalization for the full methodology.
Quick Comparison
| Dimension | SDE | Adjusted EBITDA |
|---|---|---|
| Who uses it | Owner-operator buyers, brokers | PE, search funds, lenders, financial buyers |
| Typical deal size | Under ~$1M earnings | ~$1M+ earnings |
| Owner comp treatment | Added back as a return to the buyer | Replaced with market-rate manager cost |
| Typical multiple range | ~2–4× | ~4–8×+ |
| Lender acceptance | SBA 7(a) standard | Bank, mezz, unitranche standard |
| What it answers | What will I take home running this? | What does this asset earn on its own? |
Common Novice Buyer Mistakes
Mixing the multiple with the metric
Applying a 6× Adjusted EBITDA multiple to an SDE number — or a 3× SDE multiple to Adjusted EBITDA. Either direction misprices the deal by 25–50%.
Forgetting the spouse on payroll
If the owner's spouse or family member is on the books for a no-show role, that's an add-back too — it's not part of replacement comp.
Using the owner's current salary as 'replacement'
Owners routinely under-pay (S-corp distributions) or over-pay (income smoothing) themselves. Use a market benchmark, not what's on the W-2.
Applying SDE to a business too big for one operator
If the business actually requires a GM plus ownership oversight, SDE overstates what a buyer can take home — there's no single seat to fill.
Letting the broker pick the metric
Brokers default to whichever number makes the multiple look smaller. Insist on seeing both, with a documented reconciliation between them.