SDE Calculator

Seller's Discretionary Earnings is the total financial benefit one owner-operator pulls out of a small business in a year. It's the number almost every Main Street deal under 5 million dollars gets priced on, because a buyer isn't purchasing the seller's tax strategy or salary, they're buying the earning power of the business itself.

You start with reported net income, then add back the things that won't carry over to a new owner. That's the owner's salary, the payroll taxes and benefits tied to it, interest on the seller's debt, non-cash charges like depreciation and amortization, income taxes, and any one-time or personal expenses that ran through the business. The result is a clean look at what the business can pay a single working owner.

Here's why it matters in practice. A business reporting 180,000 dollars of net income can easily carry 400,000 dollars of SDE once you add the owner's 120,000 dollar salary, depreciation, interest, and a few discretionary items back in. That gap is the whole game. Get the SDE wrong and your valuation, your offer, and your loan coverage are all wrong with it.

People mix these up constantly, so here's the clean distinction. EBITDA is earnings before interest, taxes, depreciation, and amortization. It does not add back the owner's salary, because EBITDA assumes a professional management team is already a cost of running the business. SDE does add the owner's comp back, because it's built for a hands-on buyer who will run the business themselves and take that salary as their own.

The rule of thumb: SDE for smaller owner-operated deals, EBITDA once a business is big enough to run with hired management (usually north of 1 to 2 million dollars of earnings). SDE will almost always be the larger number, since it includes the owner salary that EBITDA leaves out. If a broker quotes you an EBITDA multiple and an SDE multiple, they aren't describing the same business twice, they're using two different bases. Don't compare an SDE multiple from one listing to an EBITDA multiple on another.

Buyers normalize earnings because the seller's books are full of choices a new owner won't repeat. That's legitimate. The standard, defensible addbacks are the ones this calculator lists by default: owner salary and benefits, interest, depreciation, amortization, and income taxes. Those are non-controversial and a lender will accept them with documentation.

The discretionary bucket is where deals go sideways. A real one-time addback is a single event with a paper trail, a one-off legal settlement, a website rebuild, the owner's personal vehicle. An aggressive addback is a recurring cost dressed up as optional: marketing the seller cut to fatten the number, a key employee's salary they claim you won't need, or vague consulting fees with no invoice behind them. When the discretionary line is a large share of total SDE, treat it as a CIM red flag and ask for proof on every dollar. If the seller can't document an addback, it isn't an addback, it's wishful thinking, and you should value the deal without it.

This is exactly why buyers re-build SDE from the source documents instead of trusting the headline number in the listing. The seller is incentivized to show the biggest SDE possible. Your job is to confirm every addback is real and recurring-free before you tie a price to it.