SDE or EBITDA, which number will buyers use on my roofing company?

When a buyer or broker talks about what your roofing company earns, they'll use one of two numbers: SDE or EBITDA. Roofing company SDE vs EBITDA sounds like accounting trivia. It isn't. Using the wrong one, or comparing a multiple on one with a multiple on the other, is one of the fastest ways to get a badly wrong idea of what your company is worth.

This page explains both, works one made-up company through each, and shows where the line between them falls. It's general information. For your own numbers, sit down with your CPA.

SDE in plain words

SDE stands for seller's discretionary earnings. The Corporate Finance Institute calls it a cash-flow based measure of earnings in an owner-operated business. You start with net profit before tax and add back:

• one owner's pay and perks
• interest, depreciation and amortization
• personal costs run through the business
• true one-time costs a new owner won't have

SDE assumes one person steps into your boots. It shows what owning and running your company is worth to that person in a normal year. When two owners both work in the business, only one owner's pay comes back. CFI is clear that only one owner's benefit can be added back, and the other owner's pay is restated to what it would cost to hire someone for that work.

What counts as owner pay

For a roofing owner, owner pay usually includes your salary or wages, draws or distributions, payroll taxes on your pay, health, life or disability cover the company pays for you, retirement contributions for you, and the personal share of your truck, fuel and phone.

What doesn't count matters as much. If your spouse runs the office, books inspections and chases insurance supplements, a buyer will have to pay someone to do that. You can only add back what you pay above what the job would cost on the open market. If a family member works for free, a buyer may subtract the cost of hiring for that role.

EBITDA in plain words

EBITDA is earnings before interest, taxes, depreciation and amortization. In a sale, buyers use adjusted EBITDA: the same add-backs as SDE, except the owner's pay is replaced by a market salary for a manager who does the owner's job.

So SDE asks what a working owner could take home. Adjusted EBITDA asks what the business earns after paying someone to run it. CFI notes that EBITDA is more commonly used when valuing large companies, and SDE suits smaller, owner-run ones.

The gap between the two is mostly one line: the cost of replacing you. In roofing that's often a lot, because many owners are the top salesperson, the estimator who walks every roof, the person adjusters and property managers call, and the name on the license. The BLS national median wage for general and operations managers was $101,280 in May 2023. Our estimate for a roofing general manager is $90,000 to $150,000 plus benefits, higher in big metros and for commercial firms.

One made-up company, both numbers

Same company, two numbers, $120,000 apart. If a broker tells you companies like yours sell at a certain multiple, ask straight away: a multiple of SDE or of EBITDA? A multiple quoted on one and applied to the other can overstate or understate your price by hundreds of thousands of dollars.

Where the line falls between SDE and EBITDA

There's no legal cutoff. Buyers decide which number to use based on who would run the company after the sale and how big the earnings are.

The $1M point has outside support. Writing about HVAC, Raincatcher says private equity add-on buyers generally look for about $1M or more of EBITDA, and roofing companies listed on Axial had a median EBITDA of $1.5M and a minimum of $503K. Below that, most buyers are individuals who price on SDE. The $500K start of the middle band is our estimate.

How our estimate handles the middle

Our free estimate uses SDE when weighted adjusted EBITDA is under $500,000 and adjusted EBITDA at $1,000,000 or more. In between, it blends the two in a straight line, so a company at $750,000 is half and half. If the business can't run without you at all, it never goes more than halfway to the EBITDA basis, because no institutional buyer underwrites that without an earnout.

Why blend instead of switching at one number? Because a hard switch creates a cliff.

Illustrative estimate

Using the illustrative multiples from our methodology (not market data): a roofer with $900,000 SDE is worth about 2.8 x $900,000 = $2.52M on SDE, and about 4.0 x ($900,000 minus $140,000) = $3.04M on EBITDA. One dollar of extra profit should not move the answer by half a million dollars. The blend keeps it smooth.

Published figures for comparison, as reported by their sources: Axial letters of intent for roofing companies with $3M to $29M revenue ranged 2.8x to 7.0x EBITDA. BizBuySell's roofing listings show a median asking multiple of 3.16x SDE. Those are asking prices, not sales, and we found no published sold-deal multiple benchmark for small roofing companies.

Roofing quirks that change both numbers

Storm years

A big hail or hurricane season can swell one year. Buyers pay for repeatable earnings, so they re-base to a 3 to 5 year average or your quietest year. Sofer Advisors gives the example of a $4M hail-year roofer that is really a $1.8M business. When storm work is a big share of your revenue, our estimate averages your quietest year with your weighted recent years. Prepare a storm-free version of your numbers before anyone asks. Storm vs retail revenue explains how buyers read the mix.

Which years count

Buyers usually look at the last three years plus the trailing twelve months. If revenue is steady or uneven, our estimate weights the three years equally. If it's growing every year, the latest year gets the most weight. If it's falling, only the latest year counts, because buyers won't pay for revenue that has already gone.

Licenses, family pay, callbacks and trucks

• Owner-held license or certification. An EBITDA buyer adds the cost of a qualified replacement. An SDE buyer must qualify or hire someone. Either way it's a cost.
• Family on payroll. Real work at market pay stays in as a cost under both measures.
• Warranty callbacks. They're part of roofing. Don't add them back.
• Trucks. Both measures add back depreciation, but a buyer still prices in a fleet that needs replacing.

The roofing add-backs checklist and the add-back finder list every add-back with the proof it needs.

Common mistakes

• Mixing multiples. Applying an EBITDA multiple to SDE is the classic way to dream up a price no buyer will pay.
• Double counting. If the truck is fully added back as personal, its depreciation and interest can't come back again.
• Using your best year. A steady figure you can defend beats a high one you can't.
• Adding back costs you'll still have. Spring door knocking every year is a cost of doing business.
• Adding back both partners. Only one working owner's pay comes back.
• No paperwork. An add-back without an invoice or payroll record is likely to be thrown out.

Questions to ask your CPA, attorney or broker

1. What is my SDE for each of the last three years and the trailing twelve months?
2. What would a buyer subtract for a manager to replace me, and is that realistic here?
3. Will the buyers likely to look at us use SDE, EBITDA or both?
4. When you quote a multiple, is it on SDE or adjusted EBITDA, and is it a sold price or an asking price?
5. How would a buyer normalize my storm years?
6. Which of my add-backs would a quality of earnings review challenge?

When you want a starting point, get your free estimate. It shows both numbers and tells you which one applies.

Sources

1. Corporate Finance Institute, Seller's Discretionary Earnings
2. U.S. Bureau of Labor Statistics, OEWS May 2023, General and Operations Managers
3. Raincatcher, Private Equity in HVAC
4. Axial, Roofing M&A Activity and Market Trends
5. BizBuySell, Roofing Businesses For Sale (listing-based multiples)
6. Sofer Advisors, How to Value a Roofing Company: Storm Markets and Crew Risk