SDE (Seller's Discretionary Earnings) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are two important financial metrics used to evaluate the profitability and financial health of a business. While both metrics provide valuable insights into a company's earnings, they differ in their scope and purpose.SDE is really a measure of a company's cash flow and represents the total earnings generated by the business before deducting taxes, interest, and non-operating expenses. It includes the owner's salary, non-recurring expenses, and other discretionary items, making it a comprehensive view of the business's financial performance.

SDE is commonly utilized in small and medium-sized businesses, particularly in industries where owner involvement is significant. It can help audience understand the business's true earning potential and is often found in business valuations for privately-held companies.On the other hand, EBITDA is just a way of measuring a company's operating performance and indicates its ability to generate profits from its core operations. By excluding interest, taxes, depreciation, and amortization, EBITDA provides a clearer picture of a company's operational efficiency and profitability. It's widely found in financial analysis, particularly for larger corporations and public companies, as it permits better comparisons across different industries and capital structures.

One key difference between SDE and EBITDA lies in their applicability. SDE is more relevant for businesses with owner involvement and once the owner's salary is a significant portion of the company's expenses. It can help audience understand the real cash flow they are able to expect after acquiring the business. On one other hand, EBITDA is way better fitted to comparing the operating performance of businesses in different industries or capital structures, because it focuses solely on the operational aspects of the business SDE or EBITDA .

While both metrics have their merits, they could likewise have limitations. SDE may include discretionary expenses, rendering it susceptible to manipulation by owners seeking to inflate the company's apparent profitability. EBITDA, on another hand, does not consider working capital requirements or capital expenditures, which are critical areas of a company's financial health.