I get asked this question all the time. What is an adjusted EBITDA and SDE. Let me explain.

To derive the adjusted EBITDA from your financial statements, you would take the net income and add back interest, business taxes, depreciation, amortization, any one-time charges (which is/are non-recurring), any personal benefit that is run from the company (like auto loans, health benefits, and items like that, which are not related to the company). Basically, everything that a new owner will not incur in running the business.

Also, if the owners are taking a salary above the market rate, that will have to be accounted for and be added to the bottom line, by bringing the salary to market rate and adding any overages to the adjusted EBITDA.

SDE stands for Sellers Discretionary Earnings. In the simplest form, you take the adjusted EBITDA and you add back the entire owner’s salary to get to the SDE.

General rule of thumb is that a multiplier is lower for SDE and higher for adjusted EBITDA for valuation purposes.

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