Adjusted EBITDA and SDE: which one applies to your business

The difference in one line

EBITDA is what the business earns after paying someone a market rate to run it. SDE (seller's discretionary earnings) is what the business earns before paying the owner anything at all, so it includes one full owner's salary and benefits. SDE is therefore always the larger number for an owner-operated business, and it carries a lower multiple. Applying an EBITDA multiple to an SDE figure is the single most common way a small business gets over-valued on paper.

Add-backs buyers usually accept

• Owner remuneration above a market salary for the role actually performed.
• Genuinely non-recurring legal or restructuring costs, evidenced and dated.
• Related-party rent above market, restated to market.
• Personal expenses run through the business, if they are documented and will stop.
• One-off bad debts that are demonstrably not a pattern.

Add-backs buyers usually reject

• Costs that recur every year but were 'unusual' each time.
• Deferred maintenance, replacement capital expenditure dressed up as a one-off.
• Marketing you stopped doing, where revenue has not yet reflected stopping.
• An owner's salary add-back on top of an EBITDA basis, which double counts.
• Research and development claims or grants that will not continue after sale.

How to present it

1. Start from statutory operating profit, so the figure ties to filed accounts.
2. Add back depreciation and amortisation to reach EBITDA.
3. List each normalisation as its own line with a date, an amount and the evidence.
4. Deduct a market salary for whoever will do the owner's job after completion.
5. Show three years on the same basis, so the trend is visible and the basis is not moving.

A bridge like that, with three years on one page, is worth more in negotiation than any argument about the multiple. Run both bases through the calculator and you will see why.