SDE (Seller's Discretionary Earnings)
A measure of total financial benefit to a single owner-operator, calculated by adding the owner's compensation, personal expenses, and non-cash charges back to net profit.
What is SDE?
SDE stands for Seller's Discretionary Earnings. It represents the total economic benefit that a full-time owner-operator receives from a business — including salary, profit, and personal perks run through the company.
SDE is the primary valuation metric for small businesses, typically those with under $1M in annual earnings.
How to Calculate SDE
SDE = Net Profit + Owner's Salary + Add-backs
Common add-backs include:
- Owner's salary and benefits (health insurance, retirement contributions)
- Personal expenses charged to the business (car, cell phone, travel)
- Depreciation and amortization
- Interest expense
- One-time, non-recurring expenses (legal fees, equipment repairs)
- Owner's family member compensation above market rate
SDE vs. EBITDA
The main difference:
| | SDE | EBITDA | |---|---|---| | Owner salary | Added back | Not added back | | Best for | Small businesses | Mid-market businesses | | Typical size | Under $500K earnings | $500K+ earnings | | Buyer type | Individual operators | PE, strategic buyers |
When a business grows large enough to require professional management (typically above $500K–$1M in owner benefit), buyers shift from SDE to EBITDA — because they'll need to hire a CEO-equivalent.
SDE Multiples
Small businesses typically sell for 2–3.5x SDE, depending on:
- Industry — service businesses vs. product businesses
- Growth — growing businesses command higher multiples
- Transferability — how dependent is the business on the owner?
- Risk — customer concentration, supplier dependency
A business with $300K SDE selling at 3x would have a value of $900K.
Why SDE Matters for Sellers
Understanding your SDE before going to market lets you:
- Know your approximate value range
- Understand what buyers will focus on in due diligence
- Identify which expenses to document as legitimate add-backs
- Present the strongest possible earnings picture to buyers
Work with your accountant to calculate a defensible, adjusted SDE before engaging with buyers.