Growing a roofing business from the ground up is incredibly rewarding. It can be empowering, lucrative, and personally and professionally rewarding. However, whether you’re a serial entrepreneur or a traditional small business owner looking for an exit strategy, there’s one thing that all business owners will experience: the need to sell.
The key to a successful roofing business sale is knowing how much your company is worth. That means having it valued. The challenge? Business value can be pretty subjective. You probably have your own ideas about what your company is worth, but that doesn’t mean a potential buyer will feel the same way.
You need a way to establish a commonly perceived value that satisfies you but is also attractive to buyers.
A Path Toward Common Ground
When it comes to valuing a business, understanding the right financial metrics makes all the difference. Two commonly used terms, seller’s discretionary earnings (SDE) and earnings before interest, taxes, depreciation, and amortization (EBITDA), are important benchmarks. But they’re not interchangeable and knowing when to use each one is essential whether you’re selling, buying, or just assessing your business’s value.
Let’s dive into the key differences between SDE and EBITDA, their primary components, and how each applies to different business scenarios. Along the way, we’ll also provide guidance on selecting the right metric for your needs and explain why working with trusted experts, like Axia Advisors, is invaluable during this process.
What Is SDE, and Why Does It Matter?
SDE is often used in small to mid-sized businesses to reflect the financial benefit a single owner-operator can derive from the business. It starts with the company’s net income and adds back expenses that are discretionary or specific to the owner. These can include:
- The owner’s salary
- Personal expenses paid through the business
- Non-recurring expenses, like one-time investments or legal fees
- Non-cash expenses, such as depreciation
Essentially, SDE gives buyers a clear picture of the cash flow available to them if they were to step into the owner’s shoes. It’s an important way to get clarity in situations where the owner actively works and helps distinguish between the owner’s compensation and business profits, especially for smaller businesses where the owner’s personal involvement can significantly affect financial statements.
You can think of it as a way to erase the lines between the business owner (and their earnings) and the business so that potential buyers have an accurate idea of what the business generates. In most small businesses, there’s a pretty significant blurring of the lines between business profit and owner compensation, although it might not be in a formal salary. Owners often take perks, skip a salary in favor of a “draw”, and more. That makes it difficult to tell where “personal” ends and “business” ends.
SDE is most relevant when valuing small businesses where the owner plays a hands-on role. For example, if you’re running a family-owned bakery or an auto repair shop, SDE provides a straightforward way to show potential buyers what they can expect in terms of earnings.
What About EBITDA?
EBITDA, on the other hand, is a measure of a business’s operational performance without factoring in financing, taxes, or accounting decisions. By stripping out these variables, EBITDA allows you to see how profitable the business is at its core. You can think of it as a way to provide clarity on cash flowing into the business before it goes out to various things.
Key components of EBITDA include:
- Earnings (profit)
- Interest (excluded to focus on operational income)
- Taxes (excluded to avoid regional differences)
- Depreciation and amortization (non-cash expenses that don’t reflect daily operations)
Unlike SDE, EBITDA is usually used for mid-sized businesses or larger companies preparing for outside investment, mergers, or acquisitions. It appeals to buyers or investors who want to understand how well a business operates without the influence of financial strategies or one-off expenses.
It’s also important to understand that most mid-sized businesses are bought by other companies, rarely by individual business owners. Those companies must then put someone in place to run the company after the sale closes, which means taking on additional costs.
EBITDA also normalizes the business owner’s salary for the purpose of valuation. For instance, let’s say that the current owner (you) draws a salary of $400,000 per year. However, the market rate is $250,000 per year. With EBITDA, that would be normalized to $250,000 instead of the $400,000 actually earned.
The same is true if the business owner doesn’t take a salary. You would deduct the standard market rate the business owner should own when calculating EBITDA.
For example, let’s say you own a manufacturing company with over $1 million in earnings before deducting things like interest, and you’re looking to attract investors or sell to a larger corporation. EBITDA would provide a more objective look at your business’s operational strength than SDE would.
SDE vs. EBITDA: A Clear Comparison
Both SDE and EBITDA can help you value your business. However, they’re not created equal. Which is right for you? There’s no one-size-fits-all answer because businesses are sometimes hard to define. A “small” business by the Small Business Administration’s definition might not be all that small when it comes to valuations, for instance.
To make sense of when to use SDE or EBITDA, consider the size and nature of the business, as well as the purpose of the valuation. Let’s break things down with a side-by-side comparison of the two methods:
| Factor | SDE | EBITDA |
| Best for | Small to mid-sized businesses | Mid-sized to large businesses |
| Focus | Owner benefit | Operational performance |
| Adjustments | Owner’s salary, discretionary expenses | Non-cash expenses, interest, and taxes |
| Audience | Individual buyers | Investors, private equity firms |
If you’re selling a small business, SDE is your go-to metric because it helps individual buyers understand the earning potential. If your business is larger or you’re gearing up for significant growth, EBITDA will be the better choice to show value to institutional buyers or investors.
Choosing the Right Measurement for Your Business
Choosing the right metric depends on your business goals and who you’re trying to attract. Are you selling your small business to another owner-operator? SDE will give them a clear picture of what to expect. Are you planning to court investors or position your company for acquisition? Then EBITDA is the way to go.
For business owners, understanding these metrics isn’t just about crunching numbers. It’s really the ability to tell the right story. And when the stakes are high, getting expert advice is crucial. Axia Advisors specializes in guiding sellers through the valuation process, ensuring your business is positioned to maximize its value.
Why Axia Advisors Is Your Trusted Partner
Selling a business is one of the most significant financial decisions you’ll make. That’s why having a partner like Axia Advisors on your side is so important. With deep industry expertise and a proven track record, Axia Advisors offers personalized M&A advisory services to help you navigate every step of the process, from valuing a small business to marketing, negotiation, and closing.
Whether you’re running a mid-sized business or exploring how to value your company based on EBITDA, Axia’s team provides the strategic advice and confidentiality you need for a smooth, successful sale. Our focus isn’t just on the numbers, either. It’s on aligning your unique goals with a tailored approach to deliver the best outcome.
Final Thoughts
Understanding the differences between SDE and EBITDA is more than just a lesson in accounting. It’s an important step toward understanding your business, your goals, and your audience. By using the right metric at the right time, you can present your business in the best possible light, whether you’re connecting with an individual buyer or preparing for a larger transaction.
And remember, you don’t have to figure it all out alone. With Axia Advisors to help, you’ll have the confidence to navigate the complexities of selling your business and the expertise to maximize its value. Let us help you make your next move the right one.
