SDE vs EBITDA: Which Earnings Measure Applies to Your Business Sale in Australia

When a business broker, accountant, or buyer talks about what a business is "worth", they are almost always working from one of two profit measures: SDE or EBITDA. The two are not interchangeable. Using the wrong one — or applying a multiple designed for one to the other — produces a valuation that is either wildly optimistic or unnecessarily conservative.

This article explains what each measure is, when each applies in the Australian market, and how add-backs work under both frameworks. It is the definitional reference that underpins every sector valuation article on this site.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation. It is a measure of operating profitability that strips out financing decisions (interest), tax treatment (which varies by entity structure), and non-cash accounting charges (depreciation and amortisation).

The result is a number that reflects the cash-generating capacity of the business operations themselves, independent of how the business is financed or structured. A buyer acquiring the business can then apply their own financing and tax position to that base number.

EBITDA is the standard profit measure for larger businesses — typically those turning over $1 million or more in annual revenue. The owner's salary can still be shown as an add-back at this level, but it does not change the multiple the way it does for smaller businesses. At this size, buyers assume a management cost will remain in the business regardless of who owns it, so the salary is normalised to a market rate rather than added back in full. EBITDA is the dominant measure for transactions above $2 million.

What is SDE?

SDE stands for Seller's Discretionary Earnings. It starts with net profit and adds back the owner's total economic benefit from the business — including salary, superannuation, personal expenses run through the business, depreciation, amortisation, interest, and any other owner-specific costs that a new owner would not necessarily incur.

The logic is straightforward: in a small owner-operated business, the owner's salary is not a real cost from a buyer's perspective. If the buyer is going to work in the business themselves, they are effectively paying themselves from the profit. SDE captures the total return available to a single working owner.

SDE is the standard measure for businesses where the owner is the primary operator — almost universally for businesses turning over under $1 million in annual revenue. It is the dominant measure for cafés, trades businesses, small retail operations, and any business where the owner is on the tools or behind the counter.

The key difference in practice

Why the distinction matters for multiples

Multiples are not interchangeable between SDE and EBITDA. A 3× multiple applied to SDE is a very different transaction to a 3× multiple applied to EBITDA.

Consider a trades business with $600,000 in revenue generating $300,000 in SDE — after adding back the owner's $120,000 salary and super. A 2.5× SDE multiple produces a value of $750,000. If someone mistakenly treated that $300,000 as EBITDA and applied a 4× EBITDA multiple, they would arrive at $1.2 million — a 60% overstatement of what the market will actually pay.

The confusion arises because many business owners — and some advisers — use "profit" loosely without specifying which measure they mean. When you hear a business described as "selling for 4× profit", the first question should always be: 4× what?

The management cost problem

The owner's salary can be shown as an add-back on any business — small or large. The difference is what happens next.

On a smaller owner-operated business, adding back the salary materially increases the profit figure and directly affects the multiple. That is the point of SDE: the buyer is stepping into the owner's shoes, so the full salary return is part of what they are paying for.

On a larger business, the salary is shown but then normalised — replaced with a market-rate management cost. The assumption is that a management layer will remain regardless of who owns the business. If the owner is drawing $150,000 and a replacement manager would cost $150,000, the normalised EBITDA is unchanged. If the owner is drawing $300,000 but a market-rate manager would cost $150,000, the add-back nets to $150,000 — not the full $300,000.

The most common valuation error in the $1 million to $5 million range is presenting an owner-operated business on an EBITDA basis and adding back the full salary without applying a market-rate management cost. This overstates the earnings available to a buyer who is not going to work in the business themselves, and creates expectations that due diligence will not support.

The correct approach is to present the business on whichever basis honestly reflects the buyer's likely situation:

• If the buyer is expected to be a working owner, use SDE — the full salary add-back is legitimate
• If the buyer is expected to be a passive investor or trade acquirer, use EBITDA with the salary normalised to a market-rate management cost

Add-backs: what qualifies and what does not

Both SDE and EBITDA calculations involve add-backs — costs added back to the reported net profit to arrive at the true earnings base. The principle is the same: remove costs that are specific to the current owner and would not be incurred by a new owner operating the business on a normalised basis.

Common legitimate add-backs include:

• Owner's salary and superannuation — added back in full for SDE; shown and normalised to a market-rate management cost for EBITDA
• Personal vehicle costs run through the business
• Personal insurance premiums paid by the business
• One-off legal or accounting costs not expected to recur
• Rent paid to a related party above or below market rate (adjusted to market)
• Depreciation and amortisation (standard in both SDE and EBITDA)
• Interest on business debt (standard in both)

Add-backs that buyers will scrutinise or reject:

• Wages paid to family members who perform genuine work — a buyer will need to replace that labour
• Costs described as "one-off" that have recurred in multiple years
• Depreciation on assets that genuinely need replacement soon
• Revenue that is not expected to continue post-sale

Aggressive add-backs are one of the most common causes of valuation disputes in Australian business sales. A buyer's accountant will go through every add-back line by line during due diligence. Add-backs that cannot be substantiated with documentation will be reversed, reducing the earnings base and the final price.

Which measure applies to your business?

The honest answer depends on the size and structure of the business, and on what a buyer would actually do with it. For most businesses in the $2 million to $20 million transaction range — which is the primary market Richard Matthews operates in — EBITDA is the relevant measure, with a market-rate management cost included if the owner is currently working in the business.

For smaller businesses turning over under $1 million in revenue, where the buyer is expected to be a working owner, SDE is more appropriate and more honest. Presenting a small owner-operated business on an EBITDA basis without a management cost normalisation overstates the profit available to a passive investor and creates expectations that the due diligence process will not support.

The table below gives a rough guide by business size:

Next steps

If you are preparing to sell a business in NSW and want to understand which earnings measure applies to your situation — and what your business is likely worth on that basis — contact Richard Matthews at Link Business NSW for a free, confidential appraisal.