SDE vs EBITDA in Dental Practice Valuation: What Every Owner Should Know

SDE and EBITDA are both used to value dental practices, but they mean different things and apply to different buyer types. Here is what each metric means and why it matters for your practice.

If you have had any conversation about dental practice valuation, you have probably encountered two acronyms: SDE and EBITDA. They are often used interchangeably by people who should know better, and the confusion can cost practice owners real money when they enter a transition.

Understanding what each metric is, how it is calculated, and which buyers use which metric puts you in a significantly stronger position whether you are thinking about a sale in two years or simply want to understand what your practice is worth today.

What Is SDE?

SDE stands for Seller's Discretionary Earnings. It represents the total financial benefit a working owner-operator receives from the practice. The calculation starts with net income and adds back several categories of expenses: the owner's compensation, owner benefits such as health insurance and retirement contributions, depreciation and amortization, interest expense, and any non-recurring or personal expenses that were run through the business.

The result is a number that answers a specific question: if a buyer were to step in and run this practice full time as the operating owner, what would they take home in total economic benefit?

SDE is the most commonly used metric for valuing smaller dental practices, typically those with one or two providers and annual revenue below $1.5 million. Individual buyers using SBA financing almost universally work from SDE.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Unlike SDE, EBITDA does not add back owner compensation above a market rate. Instead, it assumes a market-rate management cost for running the practice and measures profitability above that threshold.

EBITDA is the metric DSOs and private equity backed buyers use. These buyers are not stepping in to produce dentistry themselves. They are acquiring a business asset and installing management. The relevant question for them is not what an owner-operator would earn, but what the practice generates as a standalone profitable entity above the cost of competent management.

For practices with multiple providers, higher revenue, and sophisticated operations, EBITDA is often the more relevant metric and generally produces a higher absolute valuation because the multiple applied to EBITDA by institutional buyers is typically higher than the multiple applied to SDE by individual buyers.

Why This Matters

The metric a buyer uses to evaluate your practice determines both how they calculate your value and how they structure a deal. An individual buyer working from SDE at a 3x to 4x multiple and a DSO working from EBITDA at a 5x to 7x multiple will arrive at very different numbers for the same practice.

Which metric produces a higher value for your specific practice depends on its size, structure, and profitability profile. For some practices, individual buyers offer more. For others, DSOs are clearly the better buyer. Knowing which category your practice falls into before you receive any offer is essential information.

The Normalization Piece

Both metrics require normalization, which is the process of adjusting the financial statements to reflect the true economic performance of the practice rather than what was reported for tax purposes. Undocumented add-backs, expenses that cannot be clearly traced to the owner's personal benefit, are the most common source of conflict during buyer due diligence.

A buyer or lender who cannot verify an add-back will exclude it from their calculation. Every excluded add-back reduces your normalized earnings and therefore your valuation. Clean, well-documented financial records are not just good accounting practice. They are a direct valuation driver.

Where to Start

If you do not know whether your practice is more naturally positioned for individual buyers or DSO buyers, or if you have never had your earnings normalized by someone using actual buyer underwriting criteria, that is the first conversation worth having.

The Marcaro Group Practice Valuation Assessment works through SDE normalization, buyer positioning, and the specific factors that determine which buyer category makes the most sense for your practice. Schedule a call to find out where you stand.