SDE vs EBITDA: which profit figure is your business actually valued on?

Almost every SME valuation is a profit figure multiplied by a number. Owners spend most of their energy arguing about the multiple, but the bigger swing usually sits in the profit figure — and specifically in whether the business is being valued on SDE or on EBITDA.

The two definitions

EBITDA is earnings before interest, tax, depreciation and amortisation. It measures what the business earns while still carrying the cost of running itself — including a market-rate salary for whoever manages it.

SDE — seller's discretionary earnings, sometimes called adjusted net profit or owner earnings — is the same starting point with one working owner's full remuneration and personal benefits added back. It answers a different question: how much money does this business generate in total for a single owner-operator?

Both are legitimate. They are simply designed for different buyers.

A worked example

A trading company reports £180,000 of operating profit. The owner takes £95,000 in salary, dividends via salary substitution aside, plus £12,000 of pension and £9,000 of personal motor costs. Depreciation is £20,000. A replacement manager would cost £60,000 including employer costs.

EBITDA = £180,000 + £20,000 depreciation, with the owner's package normalised down to the £60,000 replacement cost (a £56,000 uplift) = £256,000.
SDE = the same £200,000 EBITDA-before-normalisation plus the owner's entire £116,000 package = £316,000.

Same company, same accounts, £60,000 apart. Apply a 4x multiple to the wrong one and the valuation moves by a quarter of a million pounds.

Which figure applies to you

The practical test is who the likely buyer is and what they are buying.

Owner-operated, under roughly £1m of adjusted profit. The buyer is usually an individual buying a job as well as an asset. SDE is the working measure, and multiples cluster around 2x-4x.
Management team in place, £500k+ EBITDA. The buyer is acquiring earnings that continue without them. EBITDA is the measure, and multiples widen to roughly 3x-7x depending on sector and risk.
Trade buyers and private equity. Always EBITDA — they model the business into their own structure and will impose a full management cost whatever the accounts show.

The danger zone is the middle: a £400,000-profit business marketed on an SDE figure with an EBITDA multiple attached. That is how asking prices end up 50% above what any funded buyer will pay, and how six months of marketing gets wasted.

Add-backs that survive diligence

Whichever measure you use, the normalisation schedule is where deals are won and lost. Adjustments that typically hold up:

Owner remuneration above (or below) a genuine replacement cost, evidenced with a job spec and market salary data.
Personal motor, travel, subscriptions and family members on payroll who do not work in the business.
Genuinely one-off legal, dispute, rebrand or restructuring costs, with invoices to prove they were exceptional.
Rent paid to a connected party above or below market, restated to an arm's-length figure.
Discontinued product lines or contracts, provided the associated revenue comes out too.

Adjustments that usually get struck out: "growth" spend the business will obviously keep making, deferred maintenance and capex dressed up as savings, an owner's salary normalised to an implausibly low figure, and COVID-era distortions used selectively in one direction only. If an add-back cannot be evidenced from an invoice, a payroll record or a signed contract, expect a buyer's accountant to remove it.

Why this matters more than the multiple

Owners tend to negotiate the multiple because it feels like the headline. In practice the profit figure is where the leverage is: it is multiplied, so every £10,000 conceded on add-backs costs £30,000-£50,000 of price. Arriving at the table with a clean, evidenced normalisation schedule — and the right measure for your size of business — does more for the outcome than any amount of arguing about whether you deserve 4x or 4.5x.

Common questions

What is the difference between SDE and EBITDA?

SDE (seller's discretionary earnings) is profit before interest, tax, depreciation and amortisation with one full owner's salary and benefits added back. EBITDA leaves a market-rate cost of management in the numbers. For an owner-operated business the two figures can differ by £60,000-£100,000 or more, which is why the multiple applied to each is different.

Which one do UK buyers use?

Broadly, smaller owner-operated businesses — roughly under £1m of adjusted profit — trade on SDE, because the buyer is stepping into the owner's job. Larger businesses with a management team trade on EBITDA, because the buyer is acquiring earnings rather than employment. Trade buyers and private equity almost always work in EBITDA.

Can you compare an SDE multiple with an EBITDA multiple?

No, and mixing them is one of the most common valuation errors. SDE multiples are typically around 2x-4x, EBITDA multiples typically 3x-7x for UK SMEs. Applying an EBITDA multiple to an SDE figure inflates the answer substantially — often by 40-60%.

Which add-backs will a buyer accept?

Genuinely non-recurring or personal costs that the business will not carry after completion: the owner's excess salary and pension, personal motor and travel, family members not working in the business, one-off legal or restructuring fees, and clearly identified exceptional items. Buyers reject add-backs that are really running costs in disguise — deferred maintenance, under-provisioned marketing, or an owner's salary set below what a replacement manager would cost.

Does normalised profit matter more than the multiple?

Usually, yes. A 0.5x difference in multiple moves a typical SME price by a modest amount; a £70,000 argument about add-backs moves it by several hundred thousand once multiplied. Most negotiations that look like a disagreement about the multiple are really a disagreement about the profit figure.

The Business Valuers provides independent, fixed-fee valuations for UK SMEs. Ranges above are indicative market observations, not a valuation of any specific business.