EBITDA vs SDE for Australian Business Sellers

EBITDA vs SDE at a glance

Normalise earnings before comparing metrics

Reported accounts often contain owner-specific remuneration, related-party arrangements, personal expenditure and events that are unlikely to recur. Normalisation adjusts those items to estimate sustainable earnings under ordinary commercial conditions.

The process cuts both ways. It may add back a genuine one-off cost, but it should also remove one-off income or include an expense that a buyer will need to incur. Every material adjustment should be linked to a period, ledger account and supporting record.

SDE: the owner-operator lens

Seller’s discretionary earnings is commonly used for smaller owner-operated businesses. It generally begins with accounting profit and adds back interest, tax, depreciation, amortisation, one working owner’s remuneration and supportable discretionary or non-recurring expenses.

SDE is most meaningful where an incoming owner will perform substantially the same operational role. It should not be presented as free cash flow: capital expenditure, working capital, debt service and tax still matter.

EBITDA: the managed-business lens

EBITDA measures operating earnings before financing, tax and non-cash depreciation and amortisation charges. In sale work it is normally adjusted for non-recurring, non-operating and non-commercial items.

EBITDA becomes particularly relevant when a business has a genuine management layer or the buyer expects to employ management after settlement. If the seller performs work that must be replaced, the earnings base should include a supportable commercial cost for that work.

Replacement salary creates the bridge

Adding back the owner’s remuneration does not make the labour requirement disappear. The analysis should identify the owner’s duties, hours, required capability, customer responsibilities and the market cost of replacing the work.

Replacement salary deals with the cost of labour. Owner-dependency risk is separate and may still affect the valuation multiple because relationships, knowledge and decision-making capability may not transfer immediately.

A simple worked example

The following example is simplified and illustrative only. It demonstrates the bridge between the benefit available to a working owner and the earnings of a business operating under management.

The figures are not interchangeable. Each requires transaction evidence measured on a comparable earnings basis.

What buyers actually test

Experienced buyers spend less time debating the acronym than testing whether the earnings are sustainable and transferable. They examine customer retention, recurring revenue, management depth, systems, owner dependency, working capital and the capital required to maintain operations.

Common mistakes that reduce credibility

1. Treating EBITDA as cash. EBITDA excludes working-capital movements and capital expenditure.
2. Claiming unsupported add-backs. Recurring expenses do not become discretionary merely because their description changes.
3. Ignoring replacement salary. A buyer who will not perform the owner’s work must allow for the cost of replacing it.
4. Mixing the metric and multiple. EBITDA transaction evidence should not be applied mechanically to SDE.
5. Changing definitions during negotiations. Reconcile reported profit to one clearly defined earnings basis and retain the supporting evidence.

Seller preparation checklist

• Prepare three to five years of financial statements and tax returns.
• Reconcile current management accounts to the general ledger.
• List proposed normalisation adjustments with source evidence.
• Document the owner’s duties, hours and customer responsibilities.
• Obtain market support for replacement salary and related-party costs.
• Identify customer concentration, key staff, systems and transition risks.
• Keep the earnings definition consistent with the transaction evidence and valuation multiple.

For the fuller technical treatment of all three measures, including PEBITDA, see EBITDA vs PEBITDA vs SDE: Which Metric Should You Use?

Frequently asked questions

Is EBITDA the same as cash flow?

No. EBITDA does not include working-capital movements, capital expenditure, interest or tax cash flows.

Should a small business use EBITDA or SDE?

SDE is often useful where one incoming owner will perform the seller’s role. EBITDA is generally more relevant where the business operates under management. The adopted definition should always be stated clearly.

Can the owner’s salary always be added back?

No. If the work must be replaced, the earnings analysis should include a supportable market cost for the replacement role.

Does the higher earnings number produce the higher value?

Not automatically. An owner-benefit measure may be higher but can attract a different multiple because it describes a different buyer pool, operating model and risk profile.

Editorial note and disclaimer: This article provides general professional and valuation information only. It does not constitute legal, taxation, accounting or valuation advice for a particular transaction or dispute.