SDE: Seller's Discretionary Earnings

SDE is the total financial benefit a single full-time owner-operator gets from a business in a year. You start with net profit on the tax return, then add back the things that benefit the owner but aren't part of running the business: the owner's salary, their perks, and any one-time costs.

Why it matters to a buyer

On most deals under about $3M, SDE is the number the asking price is built on. Brokers quote a multiple of SDE (commonly 2x to 4x), so SDE is effectively the engine of the valuation. It's also the starting point for your DSCR, which decides whether the bank will lend. Get SDE wrong and everything downstream (price, financing, your take-home) is wrong too.

Larger businesses with a management layer use EBITDA instead, which doesn't add back owner pay (because those owners aren't the ones running the day-to-day). If you're buying an owner-operated business, SDE is your number.

The add-backs

SDE = net profit, plus:

• The owner's salary and compensation
• Owner perks (health insurance, a vehicle, personal expenses run through the business)
• Non-cash expenses (depreciation and amortization)
• One-time costs that won't recur (a lawsuit settlement, a one-off equipment purchase)
• Interest on debt that gets paid off at close

The point of the add-backs is to show what the business would earn for a new owner who runs it themselves. The risk is aggressive add-backs that inflate the number, which is exactly what a quality of earnings review checks.

Worked example

A landscaping company shows $90,000 in net profit. The owner pays himself a $110,000 salary, runs $15,000 of personal vehicle and phone costs through the business, and there's $25,000 of depreciation. SDE is $90,000 + $110,000 + $15,000 + $25,000 = $240,000. At a 3x multiple, that's a roughly $720,000 asking price (give or take, since multiples flex with deal quality).

One catch buyers forget: if you'll pay yourself a salary to run the business, subtract it before you judge whether the deal cash-flows. SDE assumes you do the owner's job for free.