SDE vs EBITDA: What's the Difference?

What is EBITDA?

• Interest: This refers to Interest on debt, including loans for small businesses. EBITDA excludes it because the amount of debt a company takes on depends on the financing structure of a company. Different companies have different capital structures and, as a result, widely different interest expenses. To better compare the relative performance of different companies, EBITDA adds interest paid on debt back to net income. Also, if the company is bought, the debt will likely not be included in the sale. 

• Taxes: Taxes vary by region. As a result, companies with similar sales can pay vastly different amounts in taxes (such as those from payroll), which would affect their net income. This can make comparing two companies located in different regions difficult. To eliminate any possible obfuscation from taxes, it’s simply removed. 

• Depreciation: Depreciation is the process of spreading out the cost of a tangible asset over the course of its useful life (the period of time the business expects to be able to use the asset). For many companies, depreciation is a very real cost that cannot be avoided. However, EBITDA adds this non-cash expense back to net income because it depends on the historical investments the company has made, not on its current operating performance. 

• Amortization: Amortization is essentially the same as depreciation. The only difference is that amortization is used for intangible assets, such as patents, licenses, copyrights, and trademarks. Some companies will have more amortization costs than others. IBM, for example, files the most patents of any U.S. based company, and therefore must spend a large sum of money on amortization costs.

How Is EBITDA Calculated?

What Is Seller's Discretionary Earnings (SDE)?

How Is SDE Calculated?

• Owner Compensation:
  • Salary and any benefits 
  • Discretionary expenses, such as:
    • Home office supplies
    • Travel expenses
    • Professional dues
    • Research
  • Non-recurring expenses, such as:
    • New computer/ technology
    • Legal fees/ expenses
  • Non-business/ personal expenses
    • Vacations
    • Personal phone bill
    • Personal gas
    • Entertainment
• EBITDA
  • Interest on debts
  • Business taxes
  • Depreciation
  • Amortization

SDE vs EBITDA Compared

Similarities

• Both SDE and EBITDA remove the effect of interest, taxes, depreciation and amortization from a company’s net income. 
• Both attempt to standardize earnings by excluding certain items that are variable from one business to another. 
• Either SDE or EBITDA may be used to value companies making between $1 and $1.5 million. 

Differences

• SDE goes a step further than EBITDA by adding back any kind of owner compensation or perks. 
• SDE is used when valuing smaller companies, while EBITDA is more commonly used when valuing large companies.
• EBITDA allows investors to compare your business against others in the same industry, whereas SDE tells an individual looking to acquire your business how much they would make if they worked full-time in the business.

Pros and Cons of Using SDE

SDE vs EBITDA Example

SDE Example

EBITDA Example

When to Use EBITDA vs SDE

• EBITDA should be used by companies making more than $1.5 million in revenue each year.
• SDE should be used by companies making $1 million or less. 
• Analysts looking at companies making between $1 million or $1.5 million can use either method. 

The Takeaway

3 Small Business Loan Tips

1. Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can compare small business loans by filling out one application on Lantern by SoFi.
2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.