SDE vs Normalized EBITDA — the small-agency vs institutional metric.

Both SDE and EBITDA are built around the same concept: normalization (also called recasting). Normalization takes reported net income and adds back owner-specific and non-operational expenses to reveal the core, transferable cash flow. The goal is an apples-to-apples view of the business's earning potential — free from the owner's personal tax decisions, financing structure, or discretionary spending habits that will not carry forward to new ownership. The metrics diverge on one critical question: how does the buyer plan to handle the owner's role post-close?

§ 01 · SDE — the owner-operator metricBuying a job.

Seller's Discretionary Earnings represents the total financial benefit available to a single owner who actively runs the business day-to-day. Formula: SDE = Net Profit + Owner's Entire Salary & Benefits + Personal Perks + Interest + Taxes + Depreciation + Amortization.

The distinguishing feature: SDE adds back 100% of the owner's salary. The logic is that in a small, owner-operated agency, the buyer is assumed to be buying a job — they will step directly into the owner's shoes and run the business themselves. The owner's salary is not a separate expense but part of the profit they are acquiring. SDE is conceptually the total owner's paycheck: it combines the company's profit and the owner's compensation into a single number.

When SDE applies.

Agency generates under $1.5M–$2M in revenue. Selling to an individual buyer or internal successor who will run the business themselves. A buyer would replace the owner directly and operate the business personally. Value is based on total cash flow available to an owner-operator.

§ 02 · Normalized EBITDA — the institutional metricBuying a business.

Normalized EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization — adjusted for owner-specific items) is the standard metric for institutional buyers and larger agencies. Formula: Normalized EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization + Personal Perks (not salary) + Excess Salary Above Market Rate.

The critical difference from SDE: Normalized EBITDA does not add back the owner's full salary. Instead, it normalizes the owner's salary to a fair market rate for a professional general manager who would replace the owner (typically $80K–$150K depending on agency size). Only the excess above that market rate is added back.

The logic: in a larger agency, the buyer is not buying a job — they are buying a scalable business they will not run themselves. They must hire a GM to operate it, so that cost is a real, ongoing expense. EBITDA values the business as a standalone enterprise, separate from the owner's personal compensation structure.

When Normalized EBITDA applies.

Agency generates $2M+ in revenue (some practitioners use $1.5M as the threshold). Selling to a PE firm, strategic buyer, or larger agency consolidator. Management structure exists or a plan to hire one exists. Buyer will not run the business personally.

§ 03 · The single critical differenceOwner salary treatment.

SDE — add back 100%. Implicit assumption: buyer will run the business themselves. Normalized EBITDA — add back only excess above market rate; $80K–$150K floor kept as expense. Implicit assumption: buyer will hire a GM to run the business.

Example: owner pays themselves $250,000. SDE adds back the full $250,000. Normalized EBITDA recognizes the market rate as $130,000 → adds back only $120,000 excess. This single difference produces meaningfully different valuations, and selecting the wrong metric will either inflate the number (using SDE for a large agency where no buyer assumes they'll operate it) or understate it (using EBITDA logic for a small operation being sold to an operator-buyer).

§ 04 · The practical decision frameworkWhich metric to lead with.

Revenue under $1.5M → SDE. Revenue $1.5M–$2M → either; calculate both, Normalized EBITDA preferred. Revenue $2M+ → Normalized EBITDA. Buyer is individual operator → SDE. Buyer is PE firm or strategic consolidator → Normalized EBITDA. Management team already in place → Normalized EBITDA.

Rule of thumb: most agency owners selling in today's market should build their case around Normalized EBITDA. Institutional buyers — which now dominate the agency M&A landscape — exclusively use EBITDA multiples. Presenting on an SDE basis signals to sophisticated buyers that the seller is not prepared for professional-grade M&A. When in doubt, calculate both; the buyer will.

The band reconciliation.

SDE-priced deals typically clear in revenue terms — small agencies under $1.5M revenue trade at a revenue or SDE multiple that, when converted to an EBITDA-equivalent basis on the buyer's side, often lands inside the 4–6× distressed-or-internal band of the canonical valuation framework. Normalized-EBITDA-priced deals span the full range: 8–10× market band for healthy independents, 10–12× competitive band with a real process, 12–19× kill-zone band for PE platform-thesis assets. The metric determines the unit of measurement; the agency's quality profile determines which band the multiple lands in.

SDE and Normalized EBITDA are not competing methods. They are two valuation languages, each appropriate for a specific kind of buyer. Sellers who speak both are negotiating-ready for both kinds of conversation.

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