EBITDA vs. SDE - What Is The Difference?

What is the difference between SDE vs EBITDA? Which one should I use to analyze a M&A deal? Why is SDE the wrong metric to use when analyzing a business' cash flow? How do I calculate EBITDA using SDE?

Business buyers often equate SDE to annual profit however there is a big difference which overestimates the true net cash flow available to business investors. Sellers Discretionary Earnings (SDE) is the adjusted profit of the business after adding back all owner salary costs and bonuses while EBITDA is the adjusted profit of a business accounting for a fair market salary for the owner operator. SDE typically inflates the adjusted earnings of a business and investors need to be aware of the risks in using this as a valuation benchmark when buying a business.

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