When you're getting ready to sell your business, the number one question buyers (and brokers) ask is: "What's it really worth?" The answer depends a lot on which financial metric you lead with—Seller's Discretionary Earnings (SDE, aka cash flow to owner) or EBITDA. Pick the wrong one, and you could leave money on the table or scare off serious buyers.

SDE is the go-to for most small, owner-operated businesses (think sole props, single-member LLCs, or Schedule C filers like we've talked about). EBITDA shines for bigger, more structured operations. Here's a clear breakdown so you can decide which fits your situation and get a fair valuation.

When SDE (Cash Flow) Is the Better Choice

SDE is built for businesses where the owner is the engine—day-to-day operations, decisions, customer relationships, everything. It adds back the owner's salary, perks, and personal expenses run through the business to show the true cash the business throws off to whoever owns it. This is perfect when:

· You're the main operator (or the business leans heavily on you). Buyers want to know what they'll actually take home after replacing you.

· It's a single-location setup with intertwined personal/business finances (common in service businesses, trades, or small retail).

· Family-run or owner-heavy operations where compensation, benefits, and one-off expenses aren't "clean" on the books.

· The goal is to show maximum discretionary cash flow for a new owner-operator.

In short: If the business value lives in the owner's pocket and hustle, SDE gives the clearest picture. It's what most small-business buyers (especially individuals) care about.

When EBITDA Makes More Sense

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) strips out financing, tax, and non-cash items to focus purely on operating profitability. It's the standard for larger or more "professional" setups because it normalizes results and makes comparisons easier. Use it when:

· You have a management team (not just you running everything).

· Multi-location or scalable operations where consistency across sites matters.

· The business has significant assets, debt, or depreciation (manufacturing, franchises, investment-backed companies).

· You're targeting institutional buyers, private equity, or franchise groups who compare apples-to-apples across deals.

EBITDA shows core earnings without owner-specific noise—great for businesses that can run without the current owner.

How to Calculate Each One

SDE (Cash Flow) Calculation Start with net profit (from Schedule C or P&L). Add back:

· Owner's full compensation (salary + benefits)

· Personal expenses run through the business (car, phone, travel, etc.)

· One-time or non-recurring costs (legal fees, big repairs, etc.)

· Non-cash items if applicable

Result: The real cash available to the owner. Buyers multiply this by an industry multiple (often 2–4x for small businesses) to estimate value.

EBITDA Calculation Start with net income. Add back:

· Interest expense

· Taxes

· Depreciation & amortization

Result: Clean operating earnings. Multiples are usually higher (4–8x or more) for larger or growth-oriented businesses.

How Your Business Structure Influences the Choice

· Heavy owner involvement? → Lead with SDE to highlight your role and discretionary cash.

· Professional team or scalable model? → EBITDA gives a more objective, transferable view.

· Growing or multi-site? → EBITDA helps standardize performance and attract serious investors.

· Transferring operations smoothly? → EBITDA makes the business look less owner-dependent.

Industry-Specific Tips

· Service businesses (consulting, trades, local services): SDE usually wins—value is tied to owner expertise and relationships.

· Retail or restaurants: Often SDE for small independents; EBITDA for chains/franchises.

· Manufacturing: EBITDA is common due to heavy depreciation and equipment.

· Professional practices (law, medical, accounting): EBITDA for comparability across firms.

· Franchises: Almost always EBITDA for consistent multi-unit analysis.

· Online/digital businesses: EBITDA highlights scalable profitability without owner-specific adjustments.

Bottom line: For most small businesses , SDE is the metric that gets the deal done—it's what buyers understand and what reflects the real money they'll pocket. If your business is larger, has a team, or you're targeting investors, EBITDA might give you a higher multiple.

Whichever you choose, make sure your books are clean and adjustments are well-documented. A good broker and CPA can help you run both and pick the one that positions your business strongest. If you're selling soon, feel free to share more details about your setup—I can help narrow it down further!