Every acquisition is priced off a profit figure, and there are three in common use. Confusing them is the single most expensive arithmetic error in small-business M&A.
Net profit
What's left after every expense, including the owner's salary and tax. It's the most conservative figure and the least useful for valuing an owner-operated business — because the owner's salary is a choice, not a cost the buyer inherits.
SDE — Seller's Discretionary Earnings
Net profit, plus the owner's compensation, plus genuinely one-off or personal expenses run through the business. It answers the question a small buyer is actually asking: "if I run this myself, what does it put in my pocket?"
This is the right basis for essentially every deal under about $1M. It is also the figure most open to abuse, because "discretionary" is doing a lot of work in that acronym.
EBITDA
Earnings before interest, tax, depreciation and amortisation — and, critically, after paying a market-rate manager to do the owner's job. If the business needs 20 hours a week of somebody competent, EBITDA subtracts the cost of hiring them.
That is why EBITDA is always lower than SDE for an owner-operated business, and why institutional buyers use it: they are not going to run it themselves.
Same business, three numbers
Line | Amount |
|---|---|
Revenue | $180,000 |
Hosting, tools, processing | −$26,000 |
Support contractor | −$18,000 |
Owner salary | −$70,000 |
Net profit | $66,000 |
SDE (add back owner salary) | $136,000 |
EBITDA (replace owner with a $55k manager) | $81,000 |
At a 3× multiple those price the business at $198,000, $408,000 and $243,000 respectively. Same business. Same month. The only thing that changed was which row you multiplied.
Which one should you use?
Buying a job — you'll operate it yourself: use SDE.
Buying an asset — you'll hire an operator or fold it into a portfolio: use EBITDA.
Comparing two listings: recompute both on the same basis before you compare a single number.
And if a seller resists giving you the raw lines to recompute it yourself, that reluctance is itself a data point.