Calculate Your Business's Cash Flow (SDE & EBITDA)

SDE (Seller's Discretionary Earnings) and EBITDA are the two earnings ("cash flow" or "free cash flow" in business acquisition palance, much to the chargrin of CPAs) metrics buyers and lenders use to value a business, and this calculator builds both from the same inputs so you can see exactly how they relate.

SDE assumes the buyer will step into the business and do the owner's job, so it adds back the full value of the owner's compensation and benefits. EBITDA assumes the business instead hires a professional manager to do that job, so it treats a market-rate manager's salary as a real, ongoing cost rather than a benefit to the buyer. Replacement management cost is the only material difference between the two views of free cash flow.

Because EBITDA removes a cost that SDE adds back, EBITDA is always the lower (or equal) figure. Smaller, owner-operated businesses are typically priced on SDE; larger businesses with a management team in place, or ones being evaluated by private equity, are typically priced on EBITDA. Building both lets you speak either buyer's language.

You start with your pre-tax net profit - the bottom-line profit before income taxes. Because it's already pre-tax, there's nothing to add back for income tax, which keeps the math clean. You'll find it on the same line of your federal return, depending on how your business is structured:

Buyers and lenders typically average the last two to three years, so use a representative figure rather than a single unusually strong (or weak) year. This same starting number feeds both your SDE and, eventually, your EBITDA.

Because it prevents the single most common SDE mistake: double-counting the owner's pay. Whether your compensation gets added back depends entirely on whether it was already deducted before your net profit line.

• Owner's draw: A draw isn't a deductible business expense, so it was never subtracted from profit. It's already in your net profit, so adding it back would inflate your SDE. (This is the typical case for sole props and single-member LLCs.)
• W-2 salary or guaranteed payment: This was deducted as a business expense before net profit, so it gets added back. (This is the typical case for S-corps and partnerships.)
• Both: Some owners take a salary and distributions. Only the deducted salary portion is added back, as the distributions are already in profit and distributed from the balanace sheet.

Answer appropriately and the calculator will adjust fields accordingly, so your owner comp is counted exactly once and carried correctly into both your SDE and EBITDA.

A good rule of thumb: an expense is a legitimate add-back if a new owner won't have to keep paying it to run the business. The calculator groups the ones buyers and lenders recognize:

• Owner compensation & benefits: One owner's salary and employer payroll taxes on it, plus health/dental/vision/life insurance and retirement contributions the business paid.
• Depreciation & amortization: These non-cash accounting items are standard add-backs and rarely disputed.
• Interest: On business debt, since the buyer will set up their own financing.
• Personal expenses: Personal-use vehicle, owner travel and entertainment, personal subscriptions and phone, owner-directed charitable gifts. (This is also the area where business owners take the most liberties to minimize taxes. Wink, wink.)
• One-time / non-recurring costs: A lawsuit, storm damage, or a one-off system build.

Just as important is knowing what to leave out. Padding your numbers with items that don't belong only gets flagged and reversed during due diligence, and it erodes your credibility with the buyer. The usual offenders:

• Payroll, sales, or property tax. These are real operating costs a buyer keeps paying. Only entity-level income tax is ever added back, and starting from pre-tax profit means there's nothing to add.
• Loan principal payments. Interest appears on the P&L and is added back; principal never hits the P&L, so there's nothing to add.
• A second owner's full salary. Only one owner-operator's pay is added back. Additional working owners should be valued at a market replacement wage.
• "One-time" costs that recur. The general rule is: If it shows up in two of the last three years, it's an operating expense, not a one-off.

The golden rule is documentation. Every add-back should be defensible with receipts and visible on your tax returns and financials, or a buyer's lender will strip it right back out.

If you own the real estate the business operates in, your rent may not reflect what an unrelated landlord would charge. Owners of both the real estate and business commonly charge above or below market rent to the business, depending on tax and exit planning goals, and this field lets you correct for that in either direction.

• If you charged the business above-market rent (or paid yourself generously as the landlord), enter a positive number to add the excess back, since a new owner would only pay market rate.
• If you charged below-market rent or let the business operate rent-free, enter a negative number. The buyer will have to pay full market rent going forward, so both SDE and EBITDA should be reduced to reflect that real cost.

Getting the direction right matters: ignoring a below-market arrangement is one of the quickest ways to overstate your numbers and have a lender push back.

Not always. Accounting for intentional "paper losses" is exactly why these metrics exist. Many owners intentionally minimize reported profit to reduce taxes, running compensation and personal expenses through the business. A company can show a slim or even negative net profit on paper that recasts to a healthy positive SDE once the legitimate add-backs go back in.

The calculator lets you enter a negative net profit for this reason. If your add-backs lift it into positive territory, that's SDE working as intended. Just be ready to document every add-back, espescially when the tax history shows a materially different story than the cash flow. Keep in mind that EBITDA starts from that same SDE and then subtracts a replacement manager's salary, so a business can show a healthy SDE but a thin or negative EBITDA if it depends heavily on the owner's own labor. If either figure is still negative after these adjustments, that may reflect genuine down years, and it's worth reviewing the figures with a CPA before you use them for pricing.

It's the market-rate annual pay to hire a professional manager to do the job you currently do as owner. It's the one input used only to convert SDE into EBITDA — the calculator subtracts it directly from SDE, and nothing else in the calculator uses it.

The right figure depends on your business's size and the scope of the role. As a general guideline:

These are general guidelines, not to replace actual market rates. Actual pay varies by industry, location, and specifics of the role.

The formula is simple: EBITDA = SDE - Replacement Manager Salary. Since SDE already adds back the owner's full compensation, subtracting a market-rate manager's salary effectively swaps "the owner runs it for free" for "a professional manager runs it for a market wage."

For example, if your SDE builds up to $400,000 and a replacement manager in your industry costs $120,000 a year, your EBITDA comes out to $280,000. The formula box below your results shows the calculated items step by step.

Then your EBITDA will come out negative, which is a meaningful signal. It means the business's earnings depend heavily on the owner's own labor and wouldn't support a hired manager at that market rate.

In that case, SDE is the more realistic metric for pricing, and the business is best suited to an owner-operator buyer rather than a management-run purchase. The calculator flags this for you once you've entered both a positive SDE and a manager salary that exceeds it.

It depends on the type of buyer:

• SDE is the standard for owner-operated Main Street businesses, generally under about $5 million in revenue. Individual buyers, SBA 7(a) lenders, and search funds who plan to work in the business typically underwrite to SDE.
• EBITDA takes over once a business is large enough to run on professional management. Private equity platforms, strategic acquirers, and family offices who plan to keep (or hire) a manager typically underwrite to EBITDA.

If you're not sure which camp your buyer pool falls into, share both.

They're the starting point for pricing. Most owner-operated businesses are valued as SDE × an industry multiple, with Main Street businesses typically trading between 2× and 4× SDE. Larger, management-run businesses are typically valued as EBITDA × an industry multiple, usually at a higher multiple than SDE deals command, since the earnings don't depend on one person.

To turn either figure into an estimated price, run it through BizBuySell's Business Valuation Calculator. If financing is part of the picture, use the DSCR Calculator to see whether the cash flow can cover a loan.

No. This tool provides educational estimates only and follows the standard pre-tax SDE-to-EBITDA method. It is not a formal appraisal, not a guarantee of value, and not tax, legal, or financial advice. Add-backs and replacement salary assumptions can be disputed by buyers and lenders, who calculate from verified tax returns and market data rather than estimates. Before you list, make an offer, or arrange financing, have a qualified CPA or business broker review and confirm your figures.