What is SDE, and how is it different from EBITDA?

Seller's discretionary earnings, or SDE, is the profit measure used for owner-operated small businesses. It takes net profit and adds back interest, taxes, depreciation, amortisation, and the full compensation and benefits of one working owner, plus discretionary personal expenses. EBITDA does not add back owner compensation. It assumes the business pays market rate for management. The difference matters enormously in practice. A business with SDE of $500,000 that needs a $150,000 general manager to run without the seller has EBITDA nearer $350,000. If a broker quotes a multiple on SDE and you mentally apply it to EBITDA, or the reverse, you will misprice the deal badly. Smaller owner-operated businesses are usually quoted on SDE. Once a real management layer exists, EBITDA becomes the relevant number.