Adjusted EBITDA vs SDE: Differences, Calculator & Use Cases

Key Takeaways

• SDE and Adjusted EBITDA are both used to value businesses, and applying the wrong one can misrepresent what your company is worth.
• SDE counts the owner’s pay as earnings a buyer keeps, while Adjusted EBITDA leaves a manager’s salary in the expenses.
• The two figures differ by roughly what it would cost to hire someone to run the business in your place.
• Owner-operated trades businesses are valued on SDE, while companies with a general manager and a management team are valued on Adjusted EBITDA.
• For HVAC and plumbing owners, Core Growth Group consults on the earnings figure buyers price against, and acquires qualifying Texas companies as an operator-buyer.

Using the Wrong Metric Costs You at the Closing Table

SDE and Adjusted EBITDA both measure profit, and both rely on add-backs, but they split on one thing: owner pay. SDE treats your compensation as money a buyer keeps, while Adjusted EBITDA treats it as a cost the business will keep carrying once you leave.

That single difference is roughly a manager’s salary, and it decides which number a buyer works from. Which one applies is not a choice you make. It follows from how much of the operation keeps running when you step back, so a business that leans on its owner gets read on SDE no matter how the seller presents it.

Core Growth Group consults with HVAC and plumbing owners on the earnings figure a buyer will price against, and on the operational work that raises it. Our founder, Clint, acquires HVAC companies in Texas, so our view of these numbers comes from experience.

What Is Seller’s Discretionary Earnings?

SDE is the total financial benefit a single working owner-operator receives from a business in a given year.

It captures the bottom-line profit along with everything the business runs through that directly benefits the owner, including compensation, perks, personal expenses, and non-cash charges.

The defining feature of SDE is that it adds back the owner’s total compensation, such as salary, benefits, and any personal expenses run through the business. The logic is straightforward. A buyer is acquiring the right to step into the owner’s shoes, so the metric needs to reflect the full economic benefit that role produces.

What SDE Includes

SDE starts with net profit and layers back in specific adjustments. These typically include:

• Owner’s salary and the payroll taxes on that salary
• Owner’s health insurance and personal benefits
• Depreciation and amortization
• Interest expense
• One-time, non-recurring expenses such as legal fees and equipment repairs
• Personal expenses run through the business, including vehicle, travel, and phone

What Is Adjusted EBITDA?

Adjusted EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, with further modifications to remove one-time, non-recurring, or non-operational items that distort operating performance.

Unlike SDE, Adjusted EBITDA does not add back the owner’s full compensation. Instead, it assumes a market-rate salary for a professional manager is already embedded in the expenses. This reflects a business that can operate independently of its current owner, which is exactly what institutional buyers, private equity firms, and acquisition lenders need to see.

What Adjusted EBITDA Includes

Starting from net income, the Adjusted EBITDA calculation adds back:

• Interest expense
• Income taxes
• Depreciation and amortization
• One-time or non-recurring expenses
• Owner compensation above a market-rate management salary

Where an owner has been paying themselves below market rate, the shortfall is deducted instead, which puts Adjusted EBITDA below the profit shown on the books.

Adjusted EBITDA vs SDE: Core Differences

Differences in How Each Metric Is Calculated

SDE adds back the owner’s entire compensation, because it assumes the buyer will replace the owner and take that money themselves.

Adjusted EBITDA adjusts only the portion above what a replacement general manager would cost. If the owner takes $180,000 and a qualified general manager would cost $120,000, Adjusted EBITDA adds back $60,000. Where the owner has been paying themselves below market, the shortfall is deducted instead.

How Valuations Differ

SDE produces a higher earnings figure than Adjusted EBITDA for the same business. The difference is roughly what a general manager would cost to replace the owner.

Owners who see both numbers assume the larger one leads to a larger price. What decides the price is which metric a buyer uses, and that is not something a seller picks.

Multiples Applied to EBITDA vs SDE

Service businesses around $5 million in revenue generally trade between 2x and 4x Adjusted EBITDA, with a baseline closer to 3x. 

The lower end reflects an owner-dependent operation with flat growth and books a buyer cannot verify. The upper end requires documented 20% to 30% year-over-year growth, recurring service work, a working management layer, and clean financials.

Small owner-operated companies priced on SDE fall in a comparable band. The multiple you earn depends on the same factors either way.

How to Calculate Each Metric

Both calculations start from pre-tax net profit, which keeps them comparable. This example uses a plumbing company doing $4.5 million in revenue with an owner taking $180,000 in salary.

SDE Calculation

Line	Amount
Pre-Tax Net Profit	$240,000
+ Owner’s Salary	$180,000
+ Owner’s Health Insurance	$18,000
+ Owner’s Vehicle (personal use)	$12,000
+ Depreciation & Amortization	$95,000
+ Interest Expense	$35,000
+ One-Time Legal Fees	$18,000
SDE	$598,000

 At a 3x multiple, this business would be valued at roughly $1,794,000. At 4x, that rises to $2,392,000.

Adjusted EBITDA Calculation

Here’s the same business with a market-rate general manager costing $120,000 a year.

Line	Amount
Pre-Tax Net Profit	$240,000
+ Excess Owner Compensation ($180,000 salary + $18,000 insurance benefits = $198,000 minus $120,000 market rate)	$78,000
+ Owner’s Vehicle (personal use)	$12,000
+ Depreciation & Amortization	$95,000
+ Interest Expense	$35,000
+ One-Time Legal Fees	$18,000
Adjusted EBITDA	$478,000

At a 3x multiple, the same business comes to roughly $1,434,000. At 4x, $1,912,000.

The two earnings figures differ by exactly $120,000, which is the manager’s cost. That single line is the whole distinction between the metrics.

When to Use Adjusted EBITDA vs SDE

The choice between these two metrics is driven by business size, ownership structure, and who is sitting across the table from you in a deal negotiation.

If you’re an owner-operator running a business where your personal involvement is central to daily revenue generation (a trades business, a local service company, a single-location retail operation), SDE is almost certainly the right metric. It records the full economic picture for someone stepping into the owner’s role.

On the other hand, if your business has department heads, a general manager, or a management team that keeps things running without you in the building every day, Adjusted EBITDA is the appropriate lens.

Institutional buyers and private equity firms rarely work from an SDE figure for a company earning $1 million or more. They will ask for Adjusted EBITDA before the conversation goes any further.

Adjusted EBITDA vs SDE: Comparison Table

Factor	SDE	Adjusted EBITDA
Owner compensation treatment	Full salary and benefits added back	Only the amount above a market-rate manager added back
Best for	Small owner-operated businesses	Businesses with management in place
Typical earnings threshold	Under $1M to $2M in annual earnings	Above $1M to $2M in annual earnings
Typical buyer type	Individual buyers and owner-operators	Private equity, institutional, and strategic acquirers
Resulting earnings figure	Higher, by roughly one manager’s salary	Lower, since a manager’s cost stays in expenses
Lender treatment	Used for smaller acquisitions	Used for larger deals
Reflects business independence	No; assumes the owner is working in the business	Yes; assumes management runs daily operations

Work Through Your Numbers with Core Growth Group

SDE and Adjusted EBITDA differ by one line, which is what a manager would cost to run the business in your place, and the buyer decides which figure applies. At Core Growth Group, we prepare HVAC and plumbing owners for sale by getting that earnings figure documented and defensible, usually across about twelve months.

We read those numbers the way a buyer will, because we acquire service businesses across Texas ourselves. Owners who fall outside our criteria can still work with us on growing or exiting when that fits their stage. Get a company valuation and see where your numbers stand today.

Frequently Asked Questions (FAQs)

Can SDE be higher than Adjusted EBITDA?

Yes, and for the same business it always is. SDE adds back the owner’s full compensation while Adjusted EBITDA keeps a market-rate manager’s salary in the expenses. The two differ by roughly that manager’s cost, and the higher figure does not mean a higher sale price.

Should I use SDE or Adjusted EBITDA for my business?

Your business decides this more than you do. If your involvement is central to daily operations and annual earnings fall under $1 million to $2 million, buyers will work from SDE. If a management team runs the company without you, they will work from Adjusted EBITDA.

How do buyers verify the add-backs used in SDE or Adjusted EBITDA?

Buyers examine every add-back during due diligence, requesting bank statements, payroll records, tax returns, and invoices that support each one. One-time expenses like legal fees need a paper trail, and owner compensation add-backs have to match payroll records and W-2s. Anything you cannot document gets removed, and at a 4x multiple, every $50,000 stripped out costs you $200,000 in price.

Does Core Growth Group work with owners who are not ready to sell?

Yes, and much of our consulting at Core Growth Group is with owners years away from a sale. On the growth side, we help select and implement the technology that brings customers in, including review generation and Google visibility. On the preparation side, our work covers cleaner financial reporting, documented systems, and reducing how much the business depends on you.

 

Disclaimer: This content is for informational purposes only and should not be considered business, financial, legal, or tax advice. Results vary based on market conditions and individual business circumstances. To learn more about scaling, preparing, or exiting your business, visit Core Growth Group.