What is EBITDA and what does it mean for your sale price?

EBITDA is a measure of what a business actually earns before accounting decisions and financing choices distort the picture. It stands for earnings before interest, taxes, depreciation, and amortization. Buyers use it because it makes businesses easier to compare, but for most small business owners, a related number called SDE is more relevant and usually produces a higher valuation.

Why EBITDA exists

The problem with net profit is that it’s affected by decisions that vary from owner to owner. How much debt you carry affects interest expense. Your tax strategy affects taxes. How aggressively you depreciate equipment affects depreciation charges. Two businesses with identical operations can show very different net profits based on these decisions.

EBITDA strips all of that out to show what the underlying business generates from operations.

Breaking down each component

Earnings. Start with net profit, the bottom line on your income statement.

+ Interest. Add back any interest you paid on business loans. This represents a financing decision, not an operational one. A buyer might finance the acquisition differently, so they strip this out.

+ Taxes. Add back income taxes. Tax strategy varies by owner and structure; buyers exclude it to compare businesses on equal terms.

+ Depreciation. Add back depreciation charges. Depreciation is a non-cash expense, it reduces profit on paper, but no money actually leaves the business in that amount. A trades business with significant truck and equipment fleets often has large depreciation charges that dramatically reduce net profit but don’t represent real cash outflow.

+ Amortization. Add back amortization of intangible assets (licenses, customer lists, goodwill from prior acquisitions). Also non-cash.

The result: EBITDA. A number that, in theory, represents what the business generates from its core operations before owner-specific financial decisions.

EBITDA vs. SDE, which one applies to your business

This is a practical question with a practical answer.

SDE (Seller’s Discretionary Earnings) is used for smaller businesses, typically those with under $1 million in annual earnings. It starts with EBITDA and then adds back the owner’s compensation, salary, personal expenses, and benefits run through the business. SDE assumes the new owner will be actively running the business, so all the financial benefit they’d receive is included.

EBITDA is used for larger businesses, those with professional management teams where the owner’s personal compensation is separate from what the business needs to operate. The logic: if someone pays $5 million for your business, they’re going to hire a manager to run it. EBITDA (not SDE) reflects what the business earns when a market-rate manager is in place.

For most owners of trades businesses under $3 million in annual earnings, SDE is the more appropriate measure and usually produces a higher number.

Situation	Use this metric
Owner-operated, under $1M earnings	SDE
Owner-operated, $1M–$3M earnings	Either; ask your broker
Professional management in place	EBITDA
Business over $3M earnings	EBITDA
Buyer is private equity or institutional	EBITDA

What “adjusted EBITDA” means

When sellers (and their brokers) present earnings to buyers, they typically present adjusted EBITDA. EBITDA plus additional add-backs specific to the owner’s situation.

Common adjustments in a trades business:

• Owner compensation above market rate (if you pay yourself $350,000 but a replacement manager would cost $120,000, $230,000 is added back)
• Personal expenses run through the business: vehicle, phone, meals, personal travel
• Family member compensation above market rate
• One-time, non-recurring expenses: a major equipment repair that won’t repeat, a one-time legal settlement, COVID relief funds
• Rent paid to a related party above or below market rate (normalized to market)

These adjustments are legitimate, they reflect the true owner earnings. But they need to be documented and defensible. Every add-back will be scrutinized by the buyer’s accountant in due diligence.

A simple example

Here’s how the numbers work for a hypothetical plumbing business:

	Amount
Net profit (as reported)	$180,000
+ Interest on equipment loans	$28,000
+ Income taxes	$42,000
+ Depreciation (trucks, equipment)	$95,000
+ Amortization	$5,000
= EBITDA	$350,000
+ Owner salary (above market replacement cost of $90K)	$110,000
+ Owner personal vehicle	$14,000
+ Owner health insurance	$18,000
+ One-time equipment repair	$22,000
= Adjusted SDE	$514,000

The difference between the $180,000 net profit and the $514,000 adjusted SDE is real. A buyer paying a 4x SDE multiple on $514,000 pays $2.056 million. A buyer who only saw net profit might have offered far less.

This is why having the right accountant represent your financials in a sale matters.

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Common questions owners ask

Should I use SDE or EBITDA for my business?

For most small business owners, those earning under $500,000 to $1 million per year from the business. SDE is the right number to use. It captures all the financial benefit the owner receives, including salary and personal expenses. EBITDA is more appropriate for larger businesses with professional management teams, where the owner's personal compensation is separate from the business's operational earnings. Your broker will tell you which metric buyers in your size range and industry prefer.

Can my EBITDA be higher than my net profit?

Yes, and it usually is. EBITDA adds back interest, taxes, depreciation, and amortization to net profit. Depreciation and amortization are non-cash accounting charges that reduce profit on paper but don't represent actual cash going out the door. A business with significant equipment (trucks, machinery) may have a net profit of $200,000 but an EBITDA of $350,000 because depreciation of $150,000 is added back. Buyers use EBITDA partly because it better reflects the cash the business actually generates.

What is 'adjusted EBITDA' and is it different from regular EBITDA?

Adjusted EBITDA adds back the same items as EBITDA (interest, taxes, depreciation, amortization) plus additional one-time, non-recurring, or owner-specific items, like a one-time legal settlement, above-market owner salary, personal expenses run through the business, or non-recurring equipment repairs. Adjusted EBITDA is the number sellers present to buyers. Buyers then perform their own quality of earnings review to verify the adjustments are legitimate. It's the most common earnings basis for small and mid-market business transactions.

Why does the multiple I apply to EBITDA seem lower than the SDE multiple?

Because they're measuring different things. SDE includes the owner's full compensation; EBITDA typically doesn't (it assumes a market-rate manager is running the business). A business might have $400,000 in SDE and $250,000 in EBITDA if the owner is paying themselves $150,000. At a 3.5x SDE multiple, the business is worth $1.4M. At a 5x EBITDA multiple, it's worth $1.25M. The multiples aren't directly comparable, they're applied to different earnings bases. A broker experienced in your market will tell you which approach applies.