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Insights · What is it worth?

How much is my business worth? SDE vs EBITDA, plainly.

By Reetika Gupta and Varun Mahajan

◆ What this piece is: a plain explanation of the two earnings figures that sit underneath every valuation conversation, from someone who sits on the buying side of the table. What it is not: a valuation of your business, a market benchmark, or a pitch. Every dollar figure below is invented and labelled as such, and we quote no multiples anywhere. Education, not advice — your accountant, attorney, and family make every real decision with you.
If you read nothing else

A multiple means nothing until you know what it multiplies. SDE includes your full pay; EBITDA does not; the same business produces both figures truthfully, roughly one market salary apart. Ask which figure any quoted multiple rides on — always — and start the add-back file while the receipts are easy to find.

Somebody quoted you a multiple. Nobody told you what it multiplies. That is the uncomfortable thing, and it is worth saying first: almost every owner who asks “what is my business worth?” gets back a number attached to a letter — a multiple of something — and the something is left unsaid. It is left unsaid because the person quoting assumes you know, or because the vagueness suits them. Either way, you are the one who ends up planning the rest of your life around a sentence you only half heard.

You are not supposed to already know this. It is genuinely confusing, and it is confusing in a direction that reliably favours whoever is doing the quoting. So let us slow down and name the two figures that matter for a business like yours: SDE and EBITDA. They describe the same business. They produce different numbers. And when a buyer and a seller each have a different one in mind, they can negotiate for weeks and never once be talking about the same thing.

One note on who is talking. Heritage buys businesses to keep them; our principals and partners have acquired and operate three businesses, and we studied three hundred to buy those three. A buyer explaining valuation to an owner is a buyer with an interest. Read every paragraph below knowing that.

Two figures, one difference: your own pay

Both figures start in the same place — the profit your tax return shows — and both climb upward from it. EBITDA adds back interest, taxes, depreciation, and amortisation, so that two businesses can be compared without the noise of how each was financed. It assumes the new owner will hire someone to do your job, so a market salary for that person stays in the costs. SDE — seller’s discretionary earnings — assumes the new owner will do your job themselves, so it adds back one full owner’s compensation on top. One figure prices the business as an investment. The other prices it as a livelihood.

Because SDE includes your full pay and EBITDA does not, SDE is always the larger number for the same business. Which is exactly why a smaller multiple attaches to it. A larger number times a smaller multiple, or a smaller number times a larger multiple — and an owner who hears a multiple without hearing which figure it rides on has learned nothing at all. That is the whole trick, and now you have seen it.

Between the tax return and either figure sits the part where the real money is argued: the add-backs. Watch the ladder.

THE BUILD-UP LADDER — ONE INVENTED COMPANY ILLUSTRATIVE ONLY — INVENTED FIGURES Net income, as the tax return states it $180,000 + Interest expense + $40,000 + Taxes paid at the entity level + $20,000 + Depreciation and amortisation + $110,000 = EBITDA $350,000 + Personal expenses run through the business (vehicle, travel) + $30,000 + A genuinely one-time legal matter, documented and settled + $25,000 + The owner’s entire compensation, put back in full + $150,000 = Seller’s discretionary earnings (SDE) $555,000 The filed number and the quoted number are three times apart — and every rung between them is an argument.
FIGURE 1The ladder from the tax return to SDE. Every amount is invented to show the mechanic; none is a benchmark or a claim about any real business. Notice that the largest single rung is the owner’s own pay — which is exactly the rung EBITDA refuses to climb.Heritage editorial. Invented figures, labelled above. No multiples stated, deliberately.
The reality gap
Today
You have heard a multiple; nobody said which earnings figure it rides on.
The gap
Between the two figures sits one market salary and the whole add-back argument, and the vagueness favours whoever quoted.
What’s possible
You walk into any conversation holding a clean, documented earnings figure under a named lens.
The first move
Restate your last three years under one lens, and start the add-back file this week, while every receipt is still easy to find.

The same business, two truthful numbers

Here is where owners and buyers talk past each other. A broker or a neighbour quotes you a multiple that was built on SDE — the convention for smaller owner-operated companies. A buyer with bank financing works from EBITDA — the convention once institutions are involved. Both are being honest. Neither is answering the other. And the gap between their two figures is, almost to the dollar, one market salary for whoever does your job.

ONE BUSINESS, TWO LENSES ILLUSTRATIVE ONLY — INVENTED FIGURES The EBITDA lens Assumes the buyer hires a manager to do your job. A market salary for that person stays in the costs. EBITDA $350,000 + Accepted add-backs + $55,000 + Owner pay above market only + $40,000 Adjusted EBITDA $445,000 A larger multiple attaches to this smaller number. The SDE lens Assumes the buyer does your job personally. Your entire pay comes back out of the costs. EBITDA $350,000 + Accepted add-backs + $55,000 + Owner pay, all of it + $150,000 SDE $555,000 A smaller multiple attaches to this larger number. The gap between the lenses is one market salary. Ask which figure any quoted multiple rides on — always. ◆ heritageplatformgroup.com · Heritage Insights
FIGURE 2Two truthful descriptions of one invented business. Neither lens is wrong. But a seller holding the right-hand number and a buyer holding the left-hand one will argue for weeks about a disagreement that does not exist — they are simply reading different lines.Heritage editorial. Invented figures, labelled above. The multiples are deliberately unstated; that refusal is the point.

The add-backs are the argument

Between the tax return and either headline figure sit the add-backs: expenses that exist because you own the business and would not exist under a new owner. Your vehicle. A family member on the payroll who does not really work in it. Rent you pay yourself at a rate your accountant chose. A one-time legal matter that was genuinely one-time.

Here is why they matter more than owners expect: every dollar of add-back a buyer accepts gets multiplied. Not added — multiplied. A single accepted add-back moves the price by several times its own size, whichever lens is in use. That is why the add-back schedule is the most examined document in any transaction, and why the argument over it is quiet, technical, and worth more than most of the loud arguments put together.

The test a buyer applies to each line is simple, and you can apply it yourself years before anyone else does.

THE ADD-BACK TEST — THREE QUESTIONS, IN ORDER 1  Would this expense continue under a new owner? If yes, stop here. YES → Not an add-back. It is a cost of the business. 2  Can you prove it — a schedule, an invoice, a market comparable? If not yet, build the file first. NO → Real, but worth little until documented. Haircut likely. 3  Did it also “not recur” last year, and the year before that? One-time things happen once. YES → Then it recurs. It will not survive diligence. Passed all three: a defensible add-back. Every accepted dollar here is multiplied in the price — which is why the quiet, documented file beats the loud claim. Prepared two years early, this file is easy to defend. Assembled in week five under pressure, it gets cut.
FIGURE 3The test a buyer runs on every add-back line. Run it on your own schedule before anyone else does. The lines that fail question one were never yours to claim; the ones that fail question two are yours to fix, starting now.Heritage editorial framing, from reading add-back schedules on the buying side.

Why we will not tell you the multiple

You may have noticed what this article refuses to do. It names the line being multiplied and declines to name the multiplier. That is deliberate, and it is the most useful discipline in the piece. A multiple quoted without a business attached is a marketing sentence, not a fact — the honest range within any industry is wide, and where a specific business lands inside it is moved by things you control: how dependent it is on you, how concentrated your customers are, how clean the books run. We wrote about those levers separately in what actually raises or lowers the multiple, and about seeing your business the way a buyer will in the buyer’s checklist you can run on yourself.

What you can do today costs nothing: decide which lens fits your business, restate your last three years under it, and start the add-back file while every receipt is still easy to find. An owner who walks into any conversation holding a clean, honest, documented earnings figure has already changed the negotiation — not by arguing harder, but by removing the fog the argument usually lives in.

The honest con — read this before anything else we say

We are a buyer, and a buyer benefits when a seller’s earnings figure is conservative. You should assume our instincts run that way and check everything here against your own accountant, who works for you and not for us. Two more things, plainly. First, our record is exactly what it is: our principals and partners have acquired and operate three businesses — we are not quoting you decades of transaction data, because we do not have decades of transaction data. Second, this article simplifies. Adjusted EBITDA, working capital, and maintenance capital spending all complicate the picture in ways that matter at the closing table, and a two-figure explanation is a beginning, not an ending. It is the right beginning. It is not the whole road.

Put the thinking to work

Our interest: A buyer benefits when a seller’s earnings figure is conservative, and we are a buyer. Your accountant — who works for you and not for us — checks every line of this.

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This article is educational. It is not individual legal, tax or investment advice, an offer or a promise of results. Your accountant, attorney, and family make every real decision with you.