SDE vs. EBITDA: Which Number Describes Your Franchise?

SDE vs. EBITDA: Which Number Describes Your Franchise?

SDE vs. EBITDA is a question every franchise owner meets when the first buyer asks for "the number", because the two terms measure different things. Seller's discretionary earnings (SDE) adds back one owner's whole pay, so it fits a franchise that you run day to day. EBITDA leaves your pay in as a cost, so it fits a business that already runs on a paid management team. So the same business shows a bigger earnings figure under SDE than under EBITDA. The choice changes the number on paper, not what the business actually earns.

What is the difference between SDE and EBITDA?

SDE starts from your profit and adds back your own compensation plus other costs a new owner would not carry. EBITDA starts from the same profit and adds back only interest, taxes, depreciation and amortization.

The International Business Brokers Association (IBBA) glossary, read 2026-10-26, defines EBITDA as "earnings of a business prior to interest (expense or income), income taxes, depreciation and amortization expenses." It lists seller's discretionary earnings under "Discretionary Earnings", which it describes as earnings before items such as non-operating and nonrecurring income and expenses, depreciation, amortization, interest and "one owner's entire compensation, including benefits and any non-business or personal expenses paid by the business."

The practical difference is the owner. SDE takes your pay out of the costs. EBITDA, as the glossary defines it, does not.

Which number fits a franchise?

SDE fits a franchise you operate yourself, and EBITDA fits one you could leave without the business needing a replacement owner. A buyer who plans to step into your seat is buying your job as well as your profit, and SDE shows them the total they would have to work with.

Picture handing the franchise to a new owner tomorrow. They draw a normal paycheck, and what is left after that is closer to what SDE measures than anything on your tax return. That is why SDE suits an owner-operated business, and why a franchise valuation can start there. Our article on how a franchise is valued shows where that figure sits in the larger picture.

If you own several units and managers run them, the answer can change. The IBBA glossary also defines an adjusted EBITDA that replaces the owner's pay with a market-rate salary for whoever performs the owner's job. A portfolio with a real management layer, where you are not the one holding it together, looks more like the business EBITDA was built for. Which measure a buyer applies is the buyer's call and their advisors', so ask early.

What can I add back, and what will a buyer accept?

An add-back is a cost in your books that a new owner would not have to pay. The IBBA glossary describes add-backs as "all or a portion of expenses that are added back to net income" so the figures sit as close as possible to the earnings the business really produced.

Which costs usually come back?

• Your own pay, plus the payroll taxes and benefits that go with it, because a new owner sets their own.
• Personal costs that run through the business, such as a vehicle, a family phone plan or travel that was not for the business.
• A genuine one-time cost, such as a lawsuit settlement or a single bad debt, if it really only happened once.
• Rent paid to an entity you own, restated to what the space would rent for at market. A comparison is what supports that restatement.

Depreciation, amortization and interest come out the same way under both measures, since they reflect past financing and accounting choices, not what the business earns day to day.

Which add-backs will a buyer challenge?

The ones without paper behind them. A cost with no invoice or cancelled check can be set aside. A "one-time" item that shows up every year under a new label reads as a recurring cost. A family member's salary may add back only to the extent it is above what the job is worth, and only if they do real work.

The cost is bigger than the disputed line. A buyer who finds one undocumented add-back has a reason to check the rest of the schedule, and that can mean a lower offer, a longer review or a buyer who leaves. That is how a review works, not a measured figure.

What you control is the paper. Gather the support for each add-back before a buyer asks for it, and drop the ones you cannot support.

Does it matter whether I sell the assets or the company?

It can matter a great deal, and it is a question for your CPA and your attorney. Selling the business's assets and selling the entity itself can carry different tax and liability results, and an earnings figure does not decide between them.

Franchisor approval applies either way. Item 17 of the Franchise Disclosure Document (FDD) has a row defining what counts as a transfer by the franchisee, and rows for whether approval is required and under what conditions (rows (k), (l) and (m), 16 CFR 436.5(q), read on Cornell Law School's Legal Information Institute, 2026-10-26). Check how your agreement defines a transfer before you assume a change in ownership structure avoids the approval step.

How do I find out which number my franchise should be judged on?

Ask for a free Opinion of Value, which does not need a finished SDE figure or a decision on deal structure. It is a personal valuation page with a custom video walkthrough recorded by a senior advisor. It is free, with no card on file.

When you are ready to look at the sale itself, our page on selling a franchise and our overview of how a franchise sale runs cover the steps. To start with your number, request your free Opinion of Value.

Frequently asked questions