Adjusted EBITDA and SDE: which one your buyer will use

The difference in one line

SDE, seller's discretionary earnings, is the total financial benefit the business gives one full-time owner-operator: profit before interest, tax, depreciation and amortisation, plus the owner's own compensation and discretionary spending. EBITDA is the same figure after a market-rate manager has been paid to do the owner's job.

So SDE is the right basis where the buyer will run the business themselves, and EBITDA where the buyer will employ somebody to. That maps closely onto the Market Pulse survey's own split at around $2M, with Main Street quoted on SDE and the lower middle market on EBITDA.

Add-backs buyers usually accept

One owner's salary and payroll taxes at market rate, on an SDE basis. Genuinely one-off legal or settlement costs, with the file to prove it. Personal vehicles, travel and phone run through the business. Discretionary owner benefits such as a family member on payroll who does not work there.

Each one needs documentary support. An add-back you assert is an argument; an add-back with an invoice behind it is a number.

Add-backs buyers usually reject

Deferred maintenance dressed up as a one-off. Marketing you stopped spending because you were preparing to sell. Anything described as exceptional that appears in more than one year, which by definition is not.

The most damaging are the ones that get withdrawn in diligence. An add-back that collapses under scrutiny does not just cost its own value at the multiple; it makes the buyer re-test every other number you gave them, and that is where deals slow down and prices move.

How to present it

A single bridge, from statutory profit to adjusted earnings, one line per adjustment, each with a reference to the evidence. Three years of it if you have three years.

Then apply the right multiple to the right basis, and say which you have used. At 5.5x, describing $400,000 of SDE as EBITDA overstates the business by roughly $800,000, and it will be found.