SDE and EBITDA aren't interchangeable, even though they get used that way
Seller's discretionary earnings (SDE) shows up constantly in Main Street business sales — the size range most home services businesses actually sell in — while EBITDA dominates conversation around larger deals. They're related, but they're not the same number, and using the wrong one (or not knowing which one you're looking at) is a fast way to misread a valuation.
What SDE actually adds back
SDE starts from EBITDA and adds back one more thing EBITDA doesn't: the owner's full compensation and benefits, on the assumption that a single owner-operator buyer will step into that role themselves rather than hiring a replacement.
SDE = EBITDA + owner's salary + owner's benefits + owner's discretionary perks
That last category is broad in practice — a vehicle the business pays for, insurance beyond what a typical employee gets, family members on payroll who don't do the work, any expense that exists because the owner runs the business and wouldn't exist under different ownership.
Why this matters more at smaller revenue
For a business generating a few hundred thousand dollars a year up to a few million, the owner's full compensation is often a meaningful share of what the business actually generates. Reporting EBITDA alone — without adding owner comp back — dramatically understates what a buyer stepping into the owner's role would actually be working with.
At larger scale, where a business already carries a full management team including a paid GM or president, the owner-compensation add-back matters less, because the business's earnings don't depend on one specific person's unpaid or underpaid labor. That's part of why EBITDA is the standard at that size and SDE is the standard below it — they're built for different assumptions about who's running the business day to day.
Where this gets misused
The same discipline that applies to EBITDA add-backs applies here, just with a bigger blind spot: every dollar added back as an "owner perk" is a dollar that needs to be real, documented, and defensible under diligence — not an inflated number built to make a listing look better. A buyer (or their accountant) checking SDE claims is looking for exactly the same things a quality-of-earnings review looks for on the EBITDA side: is this real, is it one-time, and is it documented.
The Numbers Primer covers the underlying vocabulary — gross profit, margin, EBITDA, adjusted EBITDA — that this all builds on. Getting a written, honest baseline on your own numbers, whether you're buying, selling, or just running the business, is what the ServiceTitan Operating Audit is built to produce.
This is IronMargin operational education, not legal, accounting, tax, or employment-law advice. See the disclaimer.
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