When you start exploring a practice sale, you’ll hear two acronyms used to describe practice earnings: EBITDA and SDE. They’re related but not the same – and which one applies to your situation depends on the type of transaction you’re pursuing.
What seller’s discretionary earnings means
Seller’s Discretionary Earnings (SDE) is a measure of the total financial benefit a practice owner receives from the business. It starts with net income and adds back the same items as EBITDA – interest, taxes, depreciation, amortization – but then also adds back the owner’s compensation and certain personal expenses run through the business.
The logic is straightforward: SDE reflects what the practice generates for someone who both owns and works in it. A buyer stepping into the owner role would receive all of that economic benefit. Before any debt service obligations are factored in, SDE captures the full picture.
When SDE is the right metric
SDE is most commonly used in smaller, doctor-to-doctor transactions – typically practices under $2M in revenue where an individual buyer will also work in the practice. In these deals, what matters is what the new owner-practitioner will earn personally from the business.
For corporate buyers, private equity groups, DSOs, or any transaction where the buyer won’t be practicing themselves, EBITDA is the relevant metric. These buyers are building platforms, not buying themselves jobs. They apply a replacement cost for clinical labor and value the business on what it generates above that cost. Understanding EBITDA is helpful context for how those buyers think about your practice.
Why SDE matters in your sale
Even in transactions that will ultimately be valued on EBITDA, understanding your SDE gives you a useful baseline. It tells you the total economic benefit your practice generates before you factor in how a buyer would structure clinical compensation post-sale.
SDE is also commonly used in early-stage conversations with potential buyers or advisors as a quick indicator of practice profitability – before the more detailed EBITDA normalization work is done.
The five reasons SDE matters in a practice transition:
- It shows the total economic value you’re currently extracting from the practice
- It’s the right metric for doctor-to-doctor sales and smaller independent transactions
- It serves as a baseline before EBITDA normalization in larger deals
- It helps owners understand how their compensation structure affects their valuation
- It’s often the first number an advisor asks for to gauge whether a deal makes sense to pursue
A practical example
Consider a practice with $1.2M in revenue. The owner pays herself $300K annually, which is included in operating expenses. After all expenses, net income is $75K. To arrive at SDE: add back $300K owner compensation, plus interest, depreciation, and other add-backs – arriving at an SDE of approximately $175K.
That $175K SDE gives a prospective buyer a clear picture of what the practice generates for an owner-operator. It also sets the starting point for further normalization if a corporate buyer enters the picture and applies their own EBITDA model.
Talk to PTG about your practice earnings and which metric best reflects your situation in today’s market.
Frequently asked questions
What is Seller’s Discretionary Earnings (SDE)?
SDE is a measure of total owner economic benefit from a practice. It’s calculated as net income plus add-backs (interest, taxes, depreciation, amortization) plus owner compensation and personal expenses run through the business. It represents everything the practice generates for someone who both owns and works in it.
What’s the difference between SDE and EBITDA?
EBITDA adds back interest, taxes, depreciation, and amortization to net income. SDE goes further by also adding back the owner’s compensation and certain personal expenses. EBITDA is used by corporate and institutional buyers who will hire clinical staff. SDE is used when an individual buyer will also work in the practice and receive that compensation themselves.
When should a practice use SDE vs. EBITDA for valuation?
Use SDE for smaller doctor-to-doctor transactions where the buyer will practice in the business – typically under $2M in revenue. Use EBITDA for corporate buyers, PE groups, or DSOs that will hire clinical staff at market rates. Most practices large enough to attract corporate interest are valued on EBITDA.
How does owner compensation affect SDE?
Owner compensation is added back in full when calculating SDE, since the new owner-operator would receive that compensation themselves. In EBITDA normalization for corporate sales, the calculation is different – buyers use a market replacement cost for clinical labor, and the difference between what you pay yourself and that replacement cost becomes an add-back to EBITDA.
