Neither term is a line defined for small-business acquisitions by Canadian tax law. They are analytical conventions. The useful question is not which acronym is “correct,” but which economic role and comparison the number is intended to represent.

The practical difference

EBITDA begins with business earnings before interest, taxes, depreciation and amortization, then may be normalized for unusual items. It generally assumes necessary management compensation remains an operating expense.

SDE commonly adds back one owner's compensation and discretionary benefits to estimate the total economic benefit available to one owner-operator. This is why SDE is often higher.

Reported EBITDA$240,000
Owner salary and payroll costs added back+ $110,000
Supported personal expenses+ $12,000
Unusual legal expense+ $8,000
Illustrative SDE$370,000

The replacement-operator bridge

A buyer who will manage the company full time may compare price with SDE, then evaluate whether the resulting compensation and return justify the risk. A buyer who wants an investment must subtract market compensation for the owner's actual duties.

Illustrative SDE$370,000
Replacement general manager− $115,000
Additional sales leadership retained by owner− $35,000
Buyer-adjusted operating earnings$220,000

The $150,000 difference is not “lost profit.” It is the cost of labour embedded in the seller's SDE presentation.

Five questions for every earnings figure

  1. Whose labour is included or added back?
  2. Does owner compensation cover one person or several family members?
  3. Which add-backs recur economically even if the accounting label changes?
  4. What capital expenditures are required but absent from both measures?
  5. Does the valuation multiple apply to the same earnings definition used in the comparable transactions?
Our operating view: build a bridge from tax returns and financial statements to reported EBITDA, normalized EBITDA, SDE and buyer-specific cash flow. Never accept a single adjusted number without the bridge.

Build the recast line by line

Use the deal calculator and document the evidence behind every adjustment.

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Sources and methodology

  1. BDC: Valuation approaches before buying a business.
  2. BDC: How to value a business you would like to acquire.

Bring the earnings bridge, not just the multiple.

We can help organize seller adjustments and owner-role assumptions for review with your Canadian advisers.

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General educational information only. Engage qualified Canadian accounting, valuation, tax, legal and lending professionals.