Definition
Adjusted EBITDA is EBITDA after normalising adjustments, so that it reflects the profit a business would earn under a new owner who pays someone to do the owner's job. In small business sales it is usually reached by taking SDE and subtracting a market salary for the role the owner performs. It is the common earnings measure once a business is large enough to be run by employed management.
EBITDA is earnings before interest, tax, depreciation and amortisation. It helps compare operating profit across businesses, but it is not the same as cash.
Seller's discretionary earnings (SDE)
Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.
Worked example
Northgate Joinery Ltd is a fictional UK manufacturer with SDE of £900,000. The owner works full time as managing director, and a recruiter estimates that a replacement would cost £100,000 a year including employer costs.
Adjusted EBITDA = £900,000 minus £100,000 = £800,000.
The owner also runs a car through the business that it does not need. That cost was already added back when SDE was calculated, so it must not be added back a second time.
Why buyers care
Private equity firms and family offices usually price larger deals on adjusted EBITDA, because they expect to employ management rather than run the business themselves, and lenders often size loans against it. The salary deduction matters: an understated market salary inflates adjusted EBITDA, and the multiple magnifies the error.
For any business other than SaaS valued on ARR, Loupe's valuation tool moves from an SDE basis to adjusted EBITDA when adjusted EBITDA reaches USD 500,000, or when SDE passes a ceiling set by default at USD 750,000 (both as USD equivalents). If you have not entered a market salary for the owner's role at that size, the tool asks for one rather than guessing.
Because the word "adjusted" can cover many choices, read the list of adjustments line by line and compare each one with the evidence behind it.
A family office is a private organisation that manages the wealth of one or more families. Many invest directly in private businesses and can hold them for many years.
Annual recurring revenue (ARR)
Annual recurring revenue is the yearly value of subscription or contracted revenue expected to repeat, measured at a point in time. Software businesses are often priced as a multiple of it.