SDE vs EBITDA: Which Business Valuation Method Fits Your NZ Business?

SDE and EBITDA are both used in business valuation, but they answer different questions. Choosing the wrong one can make a healthy business look weak or make a risky deal look attractive.

What SDE measures

Seller's Discretionary Earnings is designed for a business that could be operated by one owner-operator. It adds back the current owner's salary and certain personal or non-recurring expenses to show the economic benefit available to that owner.

What EBITDA measures

EBITDA means earnings before interest, tax, depreciation and amortisation. It is more useful when the business has a management team, multiple owners, a larger workforce or a structure that can continue without the seller. It is closer to the earnings available to the whole business before financing and tax decisions.

A simple decision rule

Ask whether a buyer must personally replace the seller's labour. If yes, SDE may be the more relevant starting point. If the business already has management, processes and earnings that transfer independently, EBITDA and an enterprise-value approach may be more appropriate.

Do not compare an SDE multiple with an EBITDA multiple as if they were interchangeable. Normalisation, owner replacement cost, debt, working capital and capital expenditure all need to be considered. Read our valuation guide, then ask an accountant to confirm the correct metric for your situation.