EBITDA and SDE both answer the question "how much does this business really earn?" but they answer it for different buyers. Confuse them when you sell your store and you will either underprice it or argue the wrong multiple.
When you value an ecommerce business, raw net income is nearly useless. It is distorted by financing choices, tax structure, non-cash charges, and how much the owner pays themselves. Both EBITDA and seller's discretionary earnings (SDE) are adjusted earnings figures that strip out these distortions to show normalized profitability. The difference between them is how they treat the owner, and that difference decides which one applies to your business.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures operating profitability by adding back four items to net income that have nothing to do with how the core business performs.
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
The logic: interest depends on how the business is financed, taxes depend on structure and jurisdiction, and depreciation and amortization are non-cash accounting allocations. Strip them out and you see what the operations themselves earn, independent of capital structure and accounting choices. EBITDA assumes the business is run by hired management at market salaries, so it does not add back owner compensation.
SDE stands for seller's discretionary earnings. It measures the total financial benefit a single owner-operator derives from the business. It starts where EBITDA does but goes one step further: it adds back the owner's salary and discretionary perks, on the logic that a new owner-operator would capture those for themselves.
SDE = EBITDA + Owner's compensation + Owner's discretionary expenses
Owner's discretionary expenses are the personal-ish costs running through the business: an above-market owner salary, a vehicle, travel that doubles as personal, and similar add-backs a buyer would not need to incur.
| ITEM | EBITDA | SDE |
| Adds back interest | Yes | Yes |
| Adds back taxes | Yes | Yes |
| Adds back depreciation and amortization | Yes | Yes |
| Adds back owner's salary | No | Yes |
| Adds back owner discretionary perks | No | Yes |
| Assumes | Hired management | Owner-operator |
A store with $300,000 net income, $20,000 interest, $40,000 taxes, $15,000 depreciation, and an owner who pays themselves a $120,000 salary plus runs $10,000 of discretionary expenses through the business:
Same business, two very different earnings figures. At a 4x multiple, EBITDA implies a $1.5M valuation and SDE implies $2.02M, before adjusting the multiple itself. Quoting the wrong metric against the wrong multiple is how sellers misprice their own businesses.
The dividing line is size and how the business is run, and there is a rough convention in the market.
SDE is standard for smaller, owner-operated businesses, typically those under roughly $5M in revenue or with under about $1M in earnings, where one owner runs the show. Most ecommerce brands sold through brokers fall here, and SDE is the figure buyers and brokers use.
EBITDA is standard for larger businesses with a management team in place, where the owner is not also the operator. As an ecommerce business scales past the owner-operator stage and hires real management, valuation shifts to an EBITDA basis.
The reason it matters: an SDE multiple and an EBITDA multiple are not interchangeable. SDE multiples are typically lower (because SDE is a larger number that includes owner pay), while EBITDA multiples are typically higher (because EBITDA is a smaller, more conservative number). Apply an EBITDA-style multiple to an SDE figure and you will badly overprice. Apply an SDE multiple to EBITDA and you will underprice.
Both metrics start from net income and depend on clean add-backs. If your COGS is estimated, your gross profit and therefore your net income are wrong, and both EBITDA and SDE are wrong with them. If your owner expenses are not cleanly separated from operating expenses, the add-backs become a fight you will lose during buyer diligence.
A buyer's due diligence will rebuild these numbers from your books. If the books are messy, every add-back you claim gets challenged, and the multiple drops to compensate for the uncertainty. Clean, settlement-level books with accurate per-unit COGS and clearly separated owner expenses make the earnings figure defensible, which directly protects the valuation. This is a core reason to clean up before a sale, which we cover in preparing your ecommerce books for an exit (/blog-posts/prepare-ecommerce-books-for-exit), and it starts with being able to read your own P&L correctly, covered in how to read an ecommerce P&L (/blog-posts/how-to-read-ecommerce-pl).
ConnectBooks produces the per-channel P&L, FIFO COGS, and clean expense categorization that make EBITDA and SDE defensible rather than disputed.
| NEXT STEPYour valuation rests on defensible earnings, and that rests on clean books. See how ConnectBooks builds them at /pricing. |
Both are normalized earnings figures, but SDE adds back the owner's salary and discretionary perks while EBITDA does not. EBITDA assumes the business runs on hired management at market salaries; SDE assumes a single owner-operator who would capture their own compensation. SDE is therefore the larger number for an owner-run business.
Use SDE if you are a smaller, owner-operated business, roughly under $5M in revenue or $1M in earnings, which covers most broker-sold ecommerce brands. Use EBITDA if you are larger with a management team in place and the owner is not the operator. The two use different multiples and are not interchangeable.
Because the figures differ in size. SDE includes owner compensation, so it is a larger number and carries a lower multiple. EBITDA excludes owner pay, so it is smaller and more conservative, carrying a higher multiple. Applying the wrong multiple to the wrong figure leads to serious mispricing.
SDE equals EBITDA plus the owner's compensation plus the owner's discretionary expenses. EBITDA itself is net income plus interest, taxes, depreciation, and amortization. So SDE adds back financing and non-cash items like EBITDA, then further adds back the owner's salary and personal-style expenses run through the business.
Both start from net income, which depends on accurate COGS and clean expense categorization. If COGS is estimated or owner expenses are mixed into operating costs, the earnings figure is wrong and the add-backs become disputable. During diligence, messy books cause buyers to discount the multiple, directly lowering your valuation.
Clean, accurate books make this manageable. Start a free trial of ConnectBooks to get settlement-level accuracy and real margin visibility for your ecommerce business. No credit card required.
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