SDE vs EBITDA: which number do lenders use to size an acquisition loan?

Two measures, built for different questions

SDE answers a buyer's question: if I own this business and run it myself, how much could I take out of it before paying any debt? It adds back everything one owner receives, including salary, payroll taxes on that salary, health insurance, retirement contributions and personal costs run through the company, along with interest, depreciation and one-time items.

EBITDA answers an investor's or lender's question: what does this business earn as a business, with every job in it, including the top one, paid at a market rate? It adds back interest, taxes, depreciation and amortization, and lenders then adjust it for documented one-time items. It does not add back the cost of running the company.

Build both from the same P&L

The clearest way to see the difference is to walk up from net income. Take a service company whose owner pays himself a salary of 220 plus 40 of benefits and payroll taxes, and runs some personal costs through the business.

The listing will say SDE of 780. A lender will not start there. It will ask what a market salary for someone running this company would cost, including payroll taxes and benefits. Suppose the answer is 180. The owner's pay of 260 was more than that, so the lender adds back the excess of 80 to the adjusted EBITDA and arrives at 600. That is the number the lender actually works from.

The replacement salary cuts both ways. An owner who is overpaid makes EBITDA look too low; an owner who draws little or nothing makes it look too high, and the lender will deduct a market wage the seller never paid.

Why the replacement salary is the whole argument

Lenders underwrite the business as if its owner could step away, because one day the owner might, through illness, a sale or a bad year. Someone has to be paid to do the job. That is true even when the buyer plans to run the business personally: SBA and bank lenders deduct a market salary for the buyer's role and then check separately, in a global cash flow analysis, that the buyer can live on that salary. Our page on the buyer's salary in acquisition DSCR covers that personal side.

The adjustments that most often change the number:

• Two working owners. SDE conventionally adds back one owner's pay. If a second owner or a spouse works in the business, their role still has to be paid at market after the sale.
• Family members on the payroll at below-market pay, or not on it at all. The lender adds the missing cost.
• An owner doing two jobs, such as running the company and doing the estimating or the lead technician's work. The replacement may be two salaries, not one.
• Rent paid to the owner. If the seller owns the building and charges below-market rent, the lender uses the rent the buyer will actually pay.
• Add-backs without evidence. Personal costs and one-time items count only when the records show them. See EBITDA add-backs.

Same business, two loan sizes

Continue the example. The lender's EBITDA is 600. Many lenders also subtract maintenance capital spending, here 70, the cost of replacing vehicles and equipment that wear out, leaving 530 of cash flow available for debt service. A conventional bank commonly looks for debt service coverage of at least 1.25x, and from 1 October 2026 SBA requires a change of ownership to show 1.25x on historical results.

The lender's version supports a loan roughly a third smaller. If the seller is asking 3,900 and the buyer planned on putting in the SBA minimum equity injection of 10% of project costs, the buyer expected to borrow about 3,500. The business, measured the way lenders measure it, carries about 2,970. The gap of roughly 540 must come from more buyer equity, a lower price, or a seller note. A seller note on full standby for the life of the SBA loan adds no payments and can count for up to half of the required equity injection, but no more; one that pays currently is debt and enters the coverage test, which is exactly where this buyer has no room.

The last row shows the same effect for private credit and cash-flow lenders, who commonly lend 2x to 3.5x EBITDA. Applying that range to SDE is a category error: the multiple was built for EBITDA, and applied to a figure that still contains the manager's salary it produces a loan no lender offers.

Who uses which number

SDE is not a wrong number; it is the wrong number for sizing debt. For a small owner-operated business it is a fair way to describe what the owner's job is worth plus what the business earns. The error is carrying it from the listing into the loan request. For how lenders turn either figure into a value, see how lenders value a business.

Get to the lender's number before the letter of intent

The time to rebuild the earnings figure is before agreeing a price, not after a lender has. In practice:

• Reconcile the listing to the tax returns. Lenders start from the returns; add-backs that do not appear there need evidence. See seller financials vs tax returns.
• Price the replacement role honestly, including payroll taxes and benefits, and every other role the seller or family filled.
• Pull the capex history from the depreciation schedule and fixed-asset records to see what keeping the business running actually costs.
• Use the target's latest full year of figures, never an older year, and a year-to-date P&L through last month-end.
• Plan for diligence. From 1 October 2026, SBA requires financial due diligence on every change of ownership, and a quality of earnings report on acquisitions of $3 million or more excluding real estate. See quality of earnings for acquisition loans.

Transparent's financing model includes the bridge from reported earnings to the lender's EBITDA, with the market salary and each add-back on its own line, so the buyer sees the lender's number before a lender does. Once the documents are in, the full lender package is built in a day. For the wider view of what the business can carry, see how much debt can my business carry, and for the same topic from the acquisition side, which number lenders use.