Our business broker values our company based on Seller Discretionary Earnings, but private equity groups evaluate us on adjusted EBITDA. Why does this distinction matter for our exit strategy?

Question

Tyler Smith · Accepted Answer

The gap between Seller Discretionary Earnings (SDE) and institutional adjusted EBITDA is where business owners lose millions of dollars in uncaptured enterprise value. Understanding which metric applies to your company dictates who will buy your business, how it will be financed, and the multiple it will command.

Seller Discretionary Earnings is a main-street metric designed for small owner-operator businesses. SDE takes net income and adds back all owner compensation, health insurance, vehicle allowances, and personal discretionary expenses run through the business. It assumes the incoming buyer is an individual who will physically step into your shoes, work sixty hours a week, and live off that aggregate cash flow. Main-street businesses trading on SDE rarely command more than two to four times earnings.

Institutional buyers, family offices, and private equity platforms do not buy jobs. They buy scalable cash-flow platforms. They evaluate companies strictly on adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Crucially, adjusted EBITDA does not add back owner compensation without replacement. If you are serving as the Visionary, Integrator, or head of sales, an institutional buyer will subtract the real market salary required to hire outside executives into those seats on your Accountability Chart.

If you report six hundred thousand dollars in SDE, but replacing your functions requires three hundred thousand dollars in executive payroll, your true institutional EBITDA is only three hundred thousand dollars.

To move from low SDE multiples to premium EBITDA multiples, spend your exit runway removing yourself from daily execution, replacing yourself on the Accountability Chart, and proving the business generates clean operating cash flow after paying all leadership seats market wages.