SDE vs EBITDA for behavioral health practices

If a buyer has quoted you a multiple, the first question to ask is what they are multiplying. The same practice can be described honestly two different ways, and the difference is often several hundred thousand dollars.

Nobody is being dishonest when this happens. SDE and EBITDA are both legitimate, and they answer different questions. But a multiple quoted without its basis is not information, and comparing two offers on different bases is how sellers talk themselves into the worse one.

What SDE measures

Seller’s discretionary earnings is what the business produces for one owner-operator who works in it.

It starts at net income and adds back your compensation and distributions, non-recurring expenses, personal expenses run through the business, interest, and depreciation and amortisation. The logic: a new owner-operator would not have your salary, your one-off legal bill, or your car on the books, so those dollars are available to them.

SDE is the standard basis for smaller practices, because the buyer is an individual who will run the place themselves. They are asking “what will this business pay me to work here?” — and their own labour is not a cost they need to account for separately.

What EBITDA measures

Earnings before interest, tax, depreciation and amortisation describes the same business assuming somebody is hired to manage it.

The mechanical difference is one line: a market-rate management salary is charged against earnings. If you run the practice and a comparable manager would cost $130,000, EBITDA is roughly SDE minus $130,000.

Platform and private-equity buyers insist on this view, and they are right to. They are not going to move to your town and run your practice. They will employ a manager, that manager is a permanent cost, and earnings that ignore it overstate what the business actually throws off.

Which one applies to you

Size, roughly — and it is a gradient rather than a line.

Below about $400,000 of SDE you are almost certainly in SDE territory. Your buyer is an individual clinician with an SBA loan.

Above roughly $1,000,000 of SDE, you are talking to buyers who think in EBITDA, because you are large enough to interest a platform.

In between, both views are in play, and sophisticated buyers will blend them. The buyer pool shifts gradually as you grow, which is exactly why the multiple does too — it is the same practice, but the population of people who can afford it has changed.

Here is the part that confuses people: the EBITDA multiple is always higher than the SDE multiple, and that does not mean EBITDA valuations are higher. The multiple is larger because the earnings figure it multiplies is smaller. A buyer quoting you “five times” on EBITDA may be offering less than one quoting “three times” on SDE. Always ask which.

The adjustment that catches owners out

Both bases share one correction, and it is where most owners’ expectations break.

If you still carry a caseload, a buyer subtracts the cost of replacing your clinical production — before any multiple is applied. A W-2 therapist at roughly half of collections plus payroll burden runs near 55 cents of every dollar you personally collect.

Work it through. Suppose you personally collect $240,000 a year:

• Replacing that production costs about $132,000 fully burdened
• That comes out of earnings before the multiple
• At a multiple of three, it removes roughly $396,000 from your valuation

Nearly four hundred thousand dollars, from one line, for work you might think of as the part of the job you enjoy.

This is not a trick. The revenue you personally generate leaves when you do unless someone is paid to generate it, and a buyer is pricing the business they will own rather than the one you run. But it explains why a practice billing two million can be worth far less than its owner expects, and why the fastest way to raise your valuation is usually to reduce how much of the revenue is yours.

And the mirror-image error, which inflates rather than deflates: do not add your clinical revenue back on top as a “contribution margin.” It is already inside net income. Counting it again double-counts it.

Which add-backs a buyer will actually credit

Two buyers working from the same tax return routinely arrive at different SDE figures, and the gap is almost always about add-backs. This is where a conversation about earnings gets specific, so it is worth knowing in advance which of yours will survive contact with a diligence team.

Credited without much argument:

• Your own W-2 compensation and distributions
• Interest, depreciation and amortisation
• A genuine one-off: the legal bill for a lease dispute, a build-out, an EHR migration, a single year of unusual recruiting spend
• Personal expenses that are clearly identifiable and documented — the vehicle, the phone, the conference that was really a holiday

Argued over, and often reduced:

• Family members on payroll. If your spouse does the books for twenty hours a week, a buyer has to replace those hours and will credit only the excess over a market rate for the work.
• Owner benefits that a replacement would also receive — health insurance, retirement contributions. A buyer employing a manager pays these too.
• “One-off” expenses that appear in more than one year. Three consecutive years of non-recurring legal fees is a recurring legal expense.
• Rent above or below market, especially if you own the building. Both directions get normalised, and owners are usually surprised by which way.

Rejected outright:

• Your clinical production, added back as a contribution margin. It is already in net income.
• Salary for a role the practice genuinely needs. If the position exists because the work exists, it is a cost, not an add-back.
• Anything you cannot evidence. An undocumented add-back is a number you are asking a stranger to take on trust during the one process specifically designed not to.

The practical consequence: every add-back you cannot document reduces earnings, and every dollar of earnings is multiplied. A poorly evidenced $40,000 of add-backs is not a $40,000 problem — at a multiple of three it is a $120,000 one.

The same practice, both ways

It helps to see one practice described honestly on both bases.

Take a group billing $1.6 million with $250,000 of net income. The owner takes $180,000 in compensation, personally collects $200,000, and there is $30,000 of documented non-recurring expense plus $25,000 of interest, depreciation and amortisation.

On an SDE basis: net income plus owner compensation plus the one-offs plus interest and depreciation gives $485,000 before the clinical adjustment. Replacing the owner’s $200,000 of production costs about $110,000. SDE is roughly $375,000.

On an EBITDA basis: the same $375,000, less a market-rate management salary for a practice this size — call it $130,000. EBITDA is roughly $245,000.

Now the multiples. At three times SDE the practice is worth about $1.13 million. At five times EBITDA it is worth about $1.23 million. The higher multiple is attached to the smaller number, and the two answers land closer together than either quoted multiple suggests.

Which is the point. Neither multiple means anything until you know what it is multiplying.

Comparing two offers on different bases

Practical steps when you have two numbers that are not comparable:

Ask what is being multiplied, in writing, with the earnings figure spelled out. Any serious buyer will show you. One who will not is telling you something.

Convert to a common basis. To go from SDE to EBITDA, subtract a market-rate management salary for a practice your size. To go the other way, add it back. Then compare the resulting enterprise values, not the multiples.

Check the add-backs they accepted. Two buyers working from the same tax return can reach different SDE figures because one credited your add-backs and one did not. That difference, multiplied, can exceed the difference in their multiples.

Then ignore both numbers and look at the structure. Cash at close, escrow, earnout mechanics and transition obligations move what you actually receive more than the basis does. A headline price is not a wire transfer — see how to sell a group therapy practice.

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The valuation calculator does the SDE build-up including the replacement adjustment, and blends toward EBITDA as earnings grow. Free, about four minutes, no account.