.jpg)
SDE or EBITDA? The difference decides who buys your HVAC, plumbing, or electrical company and what they'll pay. A plain-English breakdown with a worked example.
Seller's discretionary earnings (SDE) measures the total cash benefit to one owner-operator. It's used to value smaller businesses that a buyer will run personally. EBITDA measures profit after paying a market-rate manager to replace the owner. It's used by private equity and larger buyers. Moving from an SDE business to an EBITDA business usually means a different kind of buyer and a higher multiple.
Two owners. Same revenue. Same trade. Same town.
One sells for a little under three times earnings. The other sells for five or six.
The difference usually isn't hustle. It's which number the buyer used.
The two numbers, in plain English
SDE answers this: if I buy this business and run it myself, how much cash do I take home?
It starts with profit and adds back the owner's salary, perks, interest, depreciation, and one-time costs.
EBITDA answers a different question: if I buy this business and hire someone to run it, how much profit is left?
It starts with the same profit, but it pays a real manager a real salary. The owner's job becomes an expense.
A worked example
These numbers are made up to show the math. Plug in your own.
|
Line |
Amount |
|---|---|
|
Net profit on the tax return |
$250,000 |
|
Owner's salary |
$180,000 |
|
Personal expenses run through the business |
$30,000 |
|
Depreciation and amortization |
$40,000 |
|
Interest |
$20,000 |
|
One-time legal bill |
$15,000 |
|
SDE |
$535,000 |
|
Minus a market-rate general manager |
($120,000) |
|
Adjusted EBITDA |
$415,000 |
At the BizBuySell median HVAC multiple of 2.83 times SDE, that's about $1.5 million.
Now make it a business a professional buyer wants. Say it qualifies for five times adjusted EBITDA. That's about $2.1 million.
Same company. More than $550,000 apart. And the second buyer pays for a business you don't have to run.
What moves you from SDE to EBITDA
You don't get to pick which number a buyer uses. The business picks it for you.
- A real manager in place. Not "my guy could probably do it." A person already doing it.
- Enough profit to matter. Professional buyers usually look for larger earnings before they get interested.
- Numbers that hold up. Monthly financials, documented add-backs, and job costing.
- Revenue that repeats. Maintenance agreements and commercial contracts.
The trap
Some owners hear "EBITDA multiples are higher" and start quoting their SDE times six.
That's the fastest way to lose a buyer's trust. Know which number you're actually running.
FAQ
What is the difference between SDE and EBITDA? SDE includes the owner's salary and perks as part of earnings. EBITDA subtracts a market-rate salary for a manager to replace the owner. SDE values owner-operated businesses; EBITDA values businesses that run without the owner.
Which do buyers use to value an HVAC or plumbing company? Individual buyers who'll run the business usually use SDE. Private equity firms and strategic buyers usually use adjusted EBITDA, especially for companies with a management team in place.
Why are EBITDA multiples higher than SDE multiples? EBITDA multiples apply to a smaller, more conservative earnings number, and they apply to businesses that don't depend on the owner. Buyers pay more for lower risk.
Which number is your company running on? Take the Exit Readiness Scorecard. Or book a discovery call and we'll run your numbers both ways.
