SDE vs. EBITDA vs. Net Income: What’s the Difference?

If you're a small business owner trying to understand your company’s financial health—or preparing for a valuation—you've likely come across three common terms: SDE, EBITDA, and Net Income. Each one tells a different story about your business. Knowing how they differ (and when to use each) is key to making smart decisions.

Side-by-Side Comparison: SDE vs. EBITDA vs. Net Income

Metric	Stands For	Commonly Used By	Adjusts For Owner?	Includes Taxes / Interest?	Common Use Case
SDE	Seller’s Discretionary Earnings	Small business buyers / sellers	✅ Yes	❌ No	Business sales under $5M
EBITDA	Earnings Before Interest, Taxes, Depreciation, Amortization	Investors, lenders, M&A advisors	❌ No	❌ No	Mid-sized to large business valuation
Net Income	Bottom-line profit after all expenses	IRS, accountants, tax filings	❌ No	✅ Yes	Tax reporting and GAAP-based reporting

What Each One Tells You

SDE (Seller’s Discretionary Earnings)

• Includes owner’s salary, personal perks, and discretionary expenses

• Adds back interest, taxes, depreciation, and amortization

• Often includes one owner working full-time

• Used in small business sales to estimate the cash flow available to a new owner

  
  

Advantages:

• Easy to calculate for small business owners

• Reflects total benefit an owner receives

• Useful in “main street” business transactions

  
  

Disadvantages:

• Not suitable for businesses with multiple owners or complex structures

• Requires detailed documentation of add-backs

  
  

EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization)

• Normalizes income across companies for easier comparison

• Excludes financing and accounting variables

• Often used to apply valuation multiples in the M&A world

  
  

Advantages:

• Preferred by institutional buyers and lenders

• Standardized, comparable across businesses and industries

• Focuses on operational profitability

  
  

Disadvantages:

• Doesn’t account for owner-specific perks or salary

• Can be misleading without proper adjustments

• Not always intuitive for small business owners

Net Income

• “The bottom line” on your income statement

• Includes all revenue and expenses, including taxes and interest

• Used for tax reporting and financial statements

  
  

Advantages:

• Required for regulatory compliance

• Easy to find on your tax return

• Reflects actual profit left after all obligations

  
  

Disadvantages:

• Often minimized by tax strategies

• Can understate profitability due to depreciation and other non-cash expenses

• Not useful on its own for business valuation

  
  

Real-World Implications

Choosing the wrong metric can lead to valuation errors, bad negotiations, or missed opportunities:

• If you’re selling your business and show only net income, buyers may undervalue it.

• If you’re raising capital and use SDE instead of EBITDA, investors may question your financial sophistication.

• If you use EBITDA but fail to normalize it with proper add-backs, your business may look riskier than it is.

  
  

Which Metric Fits Your Scenario?

• SDE – Best for owner-operated businesses under ~$5M in revenue where the buyer will replace the owner.

• EBITDA – Ideal for larger companies, especially those with management teams and potential for outside investment or acquisition.

• Net Income – Necessary for tax compliance and GAAP reporting but not ideal for valuation on its own.

  
  

Summary

Understanding the difference between SDE vs EBITDA vs net income helps you tell the right financial story—especially when your business’s value is on the line.

If you’re unsure which metric to use for your situation, our team at Development Theory can help you calculate the right figures—and use them strategically for valuation, financing, or planning your exit. Book a Discovery Call today to get started.