M&A Glossary: SDE vs. Normalized EBITDA

/in /by Exit Strategies

M&A Glossary: SDE vs. Normalized EBITDA 

Seller discretionary earnings (SDE) and normalized EBITDA are two common measures used to assess the profitability of a business. While they are both used to determine a business’s value, they differ in the expenses and adjustments made in their calculations.

Seller discretionary earnings (SDE) is a measure of the business’s cash flow that includes the owner’s compensation and benefits, as well as perks and discretionary expenses that are not directly related business operations. Normalized EBITDA, on the other hand, is a measure of the business’s earnings before interest, taxes, depreciation, and amortization, adjusted for unusual or non-recurring items.

The main difference between SDE and normalized EBITDA is in the adjustments made for owner compensation and benefits. This means that SDE provides a more comprehensive view of the cash flow available to the owner, while normalized EBITDA provides a clearer view of the business’s underlying profitability.

SDE is commonly used in Main Street and small business transactions, while buyers in the lower middle market will be looking at normalized EBITDA.

For advice on exit planning or selling a business, contact Al Statz, CEO of Exit Strategies Group, Inc., at alstatz@exitstrategiesgroup.com. Exit Strategies Group is a partner in the Cornerstone International Alliance.