SDE vs. EBITDA and the Cost of Replacing the Owner

What SDE adds that EBITDA does not

Definitions come first because “EBITDA” and “adjusted EBITDA” are not interchangeable labels. The IBBA glossary defines EBITDA as earnings before interest and income taxes, with depreciation and amortization also excluded. Its discretionary-earnings definition goes further. It includes compensation and benefits for one working owner. Qualifying nonoperating, nonrecurring and discretionary items can also enter the measure. ^[1]

SEC staff uses the unmodified EBITDA label for the named interest, tax, depreciation, and amortization categories in public-company disclosure. A measure calculated differently needs a distinguishing title and a reconciliation in that setting. ^[2] Those rules do not govern a private-company sale, but the naming discipline prevents an adjusted number from passing as reported EBITDA.

When you put the SDE and EBITDA schedules beside the same completed income statement, keep the same start and end dates visible. Owner salary may explain much of the gap. It may not explain all of it. Personal expenses, nonoperating income, a one-time cost, or an adjustment already embedded in another row can widen, narrow, or duplicate the difference.

For the source-record build behind that first schedule, the seller's discretionary earnings calculation explains how to assemble SDE. Bring both completed schedules and the matching income statement here; every unexplained row between them remains open.

How do you reconcile SDE and EBITDA from the same period?

No fixed percentage follows from the cited definitions. Run the bridge only from the company's own schedules:

SDE cannot be converted to EBITDA with a universal percentage. The bridge depends on the company's actual owner compensation, benefits, qualifying discretionary or nonrecurring items, related offsets, and any separately proposed EBITDA adjustments. ^{[1, 2]}

Reported EBITDA = SDE − owner compensation and benefits − the sum of each signed SDE-only adjustment, only after every remaining difference has been resolved. Use a positive sign for a row that increased SDE, such as an expense add-back. Use a negative sign for a row that reduced SDE, such as income removed from the measure. Subtracting a negative row adds that amount back. ^{[1, 2]}

Read that as a reconciliation instruction, not a universal formula. Copy each row's signed effect from the SDE workpaper and name the source account, amount, period, and reason. Related income, savings, and other offsets do not all move in one direction. Reverse each row according to the sign it actually had in the SDE schedule.

If the residual does not reach reported EBITDA, the schedules use different periods, different starting figures, or additional adjustments that have not been named.

Adjusted EBITDA sits outside this identity until its extra rows are disclosed. The SEC source cannot approve a private-company adjustment, but it supplies a useful control: a differently calculated measure deserves a different name and a detailed reconciliation. ^[2]

SBA's current 7(a) loan-origination procedures make a related point in their own lending context: cash-flow analysis must document additions and subtractions such as nonrecurring income, expenses and distributions, S-corporation tax distributions, rent, and owner draws. ^[5]

When an extra row needs its own evidence, the EBITDA add-backs guide handles that support.

Run the equation on your own reporting period and accounts. It shows why two businesses with identical reported EBITDA can have different SDE figures, and why a revenue or earnings cutoff cannot reconcile the schedules for you.

The owner's paycheck and the owner's job are separate facts

Payroll records what the company paid the owner. They do not show whether the customer calls, purchasing decisions, estimating, production supervision, technical approvals, or employee issues will disappear with the sale. A high salary can accompany a narrow role. A modest salary can hide a job spread across the company.

The historical reconciliation therefore ends before the post-sale operating case begins. If an owner-operator buyer expects to perform the work, SDE may describe the economic benefit that buyer is examining. If the company needs a manager, licensed professional, salesperson, or several employees to absorb the duties, their expected cost belongs in a separately labeled operating case. Neither the IBBA glossary nor the SEC guidance sets that cost or chooses the buyer's plan. ^{[1, 2]}

You can test the assumption against duties that cannot wait through a transition: a relationship held only by the owner, an approval no one else can give, a weekly operating decision, or work tied to a credential.

Identify the person already capable of taking each duty. An unfilled role needs a stated coverage assumption, but the owner's old paycheck is not automatically the cost of that assumption.

The result may support SDE, reported EBITDA, or a carefully reconciled adjusted EBITDA discussion. It may also reveal that none of the current schedules describes the proposed post-sale operation. An explicit operating case lets the private-company valuation desk place that earnings question inside the broader valuation work.

The earnings denominator underneath an offer

An offer that quotes an earnings multiple is incomplete. The missing denominator could be SDE, reported EBITDA, adjusted EBITDA, or another measure, and each may contain a different period and adjustment set.

CFA Institute's valuation curriculum pairs enterprise value with an entire-company denominator such as EBITDA. ^[4] No private-company multiple comes from that curriculum. The numerator-and-denominator relationship still matters: a multiple quoted against SDE cannot be moved to EBITDA unchanged and still describe the same calculation.

Keep four labels together on the offer or valuation schedule: the value being discussed, the exact earnings measure, the start and end dates, and the reconciliation of every adjustment. IVS guidance likewise emphasizes purpose, relevant information, assumptions, and limits in valuation work. ^[3] IVS does not decide which measure fits this company, but its requirements make an unlabeled denominator hard to defend.

A settled denominator lets the business valuation methods guide explain how an earnings measure enters a valuation approach. For the separate capital-structure question, the enterprise value and equity value comparison explains what the indicated enterprise value means for owner proceeds.

After that preparation, a confidential valuation discussion is most useful. The unresolved question should be specific: which earnings denominator reflects the proposed post-sale operation, and which rows remain disputed?