EBITDA vs SDE: What's the Difference? | A Business Lawyer Explains

EBITDA & SDE are terms Brett comes across all the time as a business lawyer and M&A advisor, and they are incredibly important fundamental terms to understand in the mergers and acquisitions context.
Ultimately, EBITDA & SDE are metrics used to equalize comparisons between two companies. They differ primarily in the financial size of the companies each measurement is used to normalize.
Seller discretionary earnings is helpful in smaller owner-operated businesses while EBITDA is used in larger businesses.
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Brett A. Cenkus has 20+ years of experience in business law, finance, and entrepreneurship. Through Cenkus Law, PC, he provides advice and services for mergers & acquisitions (M&A), securities offerings, founders’ agreements, and other general business law issues.
Through Braaten Woods, LLC, Brett helps business owners in the lower middle market ($2MM - $25MM) position themselves for sale, find buyers, negotiate, and close M&A deals.
Brett also maintains merger-resources.com, a site packed with free articles, videos, checklists, deal diagrams, template contracts, and other tools to help pass M&A knowledge to others.
Brett regularly consults with entrepreneurs and invests his own capital as an angel investor.
From 2010-2013, Brett served as Chief Legal Counsel of a publicly-traded international oilfield services company. From 2001 to 2006, he and a partner founded and built Paragon Residential Mortgage. Bridge Investments acquired Paragon in 2006.
Brett holds a Juris Doctorate from Harvard Law School and a Bachelor of Arts degree in Economics from Messiah College in Grantham, Pennsylvania.
Brett lives in Austin with his wife, Cathryn, and two children. He enjoys reading, squash, classic movies, great food and wine, and the New England Patriots.
#corporatelaw #mergersandaquisitions #businesslaw #corporatelawyer

[@elefanny1106]

Great video

[@TheOriginalCryptoPimp]

Thanks for the great videos. Much appreciation.

[@kanchithakkar8471]

incredible series.... thank you so much

[@DeborahLewis-t2l]

Adolph Station

[@MrPeru510]

If an owner takes a salary does that role back into the SDE? And if an owner does not take a salary how do they pay themselves off the business? Thanks for the content.

[@TraceyEric-d8q]

Kurt Curve

[@danchristian9002]

Brett, you need to figure out how to really get this out there more.SO fantastic

[@stjepanvidovic7193]

I am calculating SDE & EBITDA for one of my partners...As the business is digital, company doesn't have much COGS and when I get the result SDE is higher than the revenue...And partner is asking how can revenue be lower than earnings? So started to wonder if I am doing it correctly...For example, revenue is $400K and SDE is $450K

[@sakshi1958]

Thanks for amazing explanation

[@BrettCenkus]

You're welcome!

[@VRbear11]

Brett, I am involved in a M&A that has some misleading evaluations occurring in the background. I'm finding that mistakes are common within an evaluation and having multiple opinions can mean multiple sets of mistakes. I really appreciate your video because It's helping me understand how the evaluation rats nest has become what it is due to the misapplication of evolution standards. You are the man! Keep it up, I subscribed and hope to learn more from you.

[@BrettCenkus]

yes, more opportunity for mistakes, although also more opportunity for a consensus number you can trust (with multiple opinions). Great comment and thank you for the feedback!

[@cbdbotanicaltherapy]

Nice video. Very helpful.

[@dmhall0]

Great videos! Thanks for all the helpful content. Quick question... I have seen "adjusted earnings" where they try to add back the entire owner-operator pay; yet that owner is a critical employee and their salary is not inflated (i.e. salary of $80M for an $80M job). I get the add-back if they are paying themselves $200M for the $80M job. What are you thoughts here? All get added back or only the amount in excess of a normal job rate?

[@BrettCenkus]

Great question! It depends on the part of the market in which the deal is getting done. In main street deals (under $2 million is where we set the cutoff), it often all gets added back in as part of an SDE (seller discretionary earnings) calculation. The thinking is that those types of businesses are generally extensions of the owner, and any buyer will step into the owner-operator's shoes, working in (not just on) the business. So, it's helpful for a buyer to know how much will be left for him/her when the smoke clears. That figure is SDE. In deals above the main street level--certainly when you start getting up into the lower middle market--businesses are purchased by private equity (financial) buyers, not just owner-operators, or as stand-alone subsidiaries of larger companies, which are all worlds in which the more relevant metric is EBITDA. In an EBITDA calculation, the fair market salary does not get added back because that type of buyer is not looking to put themselves into the owner-operator's shoes. Instead, they will continue to pay for that position, possibly only normalizing above-market comp.

[@briandarling2979]

Brett, thanks for the information. I have always ‘learned’ to buy a company through the multiple of EBITDA. However, now that I am solo and do not have a PE firm working alongside of me many businesses I look at sell their business of of SDE. But I have an issue with this as ‘removing’ the owner salary, health ins, car ins, etc is something that I will want to do as well and let’s say they aren’t taking a huge amount of the aforementioned above out, how can I justify my purchase price if their SDE is say $250K but I would need that as the new owner PLUS I would have a debt service for the purchase of the business? I assume my only option is to NOT take a salary and other items?

[@kickstand9952]

It’s fucked man with the debt service of these small business That use SDE , I mean I evaluated hundreds of cims from business brokers and something is always off if you can Ebitda is the way to go but all of them use SDE for like he said ,id say anything for 4 million or below most of them for sale that I look at don’t have alot of debt service but they are for sale 4-6 times their listed bullshit SDE and inflated compensation of officers that aren’t even listed on K 1s or 1120s

[@neilgarceau5788]

I have tried to watch your videos but can only listen. Your hands are so distracting and take away from your messaging.

[@BrettCenkus]

I appreciate your feedback and hope you continue to listen.

[@NoahFlemingConsulting]

Very good info.

[@ajo229]

awesome videos. Just started a internship in Corporate Development- these have helped round out everything

[@BrettCenkus]

glad you're finding them helpful!