SDE vs EBITDA: Which Method Should You Use to Value a New Zealand Business?

SDE vs EBITDA: Which Method Should You Use to Value a New Zealand Business?

If you've searched for how to value a business, you've probably run into both terms — SDE and EBITDA — often used as if they're interchangeable. They're not, and picking the wrong one can throw your valuation off by a large margin. Here's the difference, and why almost every small NZ business sale uses one over the other.

What Is SDE?

Seller's Discretionary Earnings (SDE) is the total financial benefit a single full-time owner-operator gets from a business in one year. It starts from net profit and adds back everything that's really part of the owner's personal return, not a true operating cost:

SDE = Net Profit + Owner's Salary + Owner's Perks + Interest + Depreciation + One-off / Non-recurring Expenses

The logic: if a new owner buys the business and runs it themselves, they get all of this — the salary they'd otherwise pay a manager, the truck lease that was really personal use, the one-off legal bill from a dispute that won't recur. SDE captures the full economic benefit of owning and running the business day-to-day.

What Is EBITDA?

EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) starts from the same net profit figure but stops earlier — it adds back interest, tax, depreciation and amortisation, but not the owner's salary or personal perks.

EBITDA = Net Profit + Interest + Tax + Depreciation + Amortisation

EBITDA assumes the business is run by a *paid, professional manager* — so the owner's salary stays in as a real operating cost, because in a company of any real size, someone has to be paid to do that job whether or not the current owner is doing it themselves.

The Core Difference, in One Sentence

SDE assumes an owner-operator will run the business themselves. EBITDA assumes a manager will be paid to run it. That single assumption is why the two numbers — and the multiples applied to them — are completely different, even for the exact same business.

Why NZ Small Business Valuations Use SDE, Not EBITDA

Almost every small and micro business sale in New Zealand — cafés, trades businesses, retail stores, small service businesses — is valued using SDE, not EBITDA. The reason is practical: the buyer of a $150,000–$800,000 business is almost always going to work in it themselves. Adding back the owner's salary reflects the real economic reality of what that buyer is purchasing — a job plus a return on investment, not a passive shareholding in a professionally managed company.

Because SDE is a bigger number than EBITDA (it includes the owner's salary that EBITDA leaves out), SDE multiples are correspondingly lower — typically in the 1.5x–4.5x range for NZ small businesses, compared to EBITDA multiples of 4x–10x+ commonly seen for larger, professionally managed companies. This trips up a lot of first-time sellers who've read general business valuation content (often written with US mid-market or EBITDA-based deals in mind) and assume a 5x or 6x multiple applies to their $300,000 café. It almost never does — that multiple belongs to a different method, for a different-sized business.

When EBITDA Makes More Sense

EBITDA becomes the right tool once a business is large enough that:

Below that threshold, EBITDA multiples applied to a small owner-operator business will usually produce a value that's disconnected from what real buyers in that market actually pay.

A Worked Example

Take a hypothetical Auckland café with:

SDE = $60,000 + $55,000 + $8,000 + $5,000 = $128,000 EBITDA = $60,000 + $8,000 (no owner salary add-back) = $68,000

At a typical café SDE multiple of around 1.8x, this business values at roughly $230,000. Apply an EBITDA multiple instead — say a generic 5x pulled from unrelated content — and you'd get $340,000, a figure no realistic buyer of a café this size would pay. The method matters as much as the multiple.

Common Mistakes When Calculating SDE

Bottom Line

If you're valuing (or buying) a small to mid-sized owner-operator business in New Zealand, use SDE — it's the method that reflects what an owner-operator buyer actually receives and is willing to pay for. Save EBITDA for businesses large enough to be run by paid management, where a different type of buyer is in the market.

Not sure which figure applies to your business, or want the calculation done for you? Our free AI Valuation tool calculates SDE automatically from your financials and applies the correct NZ industry multiple range — no spreadsheet required.