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Financial MetricsGrowth

Seller's Discretionary Earnings (SDE)

Part of our guide: Startup Stages & Financial Readiness

Quick Definition

The total financial benefit a single owner-operator extracts from a business, used to value small businesses and startups.

What is Seller's Discretionary Earnings?

SDE represents the total pre-tax earnings available to a single full-time owner-operator. It starts with net income, then adds back the owner's salary, owner benefits, interest, depreciation, amortization, and one-time or non-recurring expenses.

Why SDE Matters for Founders

If you are building to sell, especially a bootstrapped SaaS or ecommerce business under $5M in revenue, buyers will likely value your company as a multiple of SDE. Understanding SDE helps you optimize for exit value.

SDE is particularly relevant for lifestyle businesses and small acquisitions where the buyer will be the operator. It shows the total cash flow available to someone who steps into your shoes.

SDE vs EBITDA

SDE includes owner compensation add-backs. EBITDA does not. For larger companies with professional management teams, EBITDA is the standard. For owner-operated businesses under $5M revenue, SDE is more common.

Formula

SDE = Net Income + Owner's Salary + Owner Benefits + Interest + Depreciation + Amortization + One-Time Expenses

Example

Your bootstrapped SaaS has:

  • Net Income: $150,000
  • Your Salary: $120,000
  • Your Health Insurance: $15,000
  • Interest: $5,000
  • One-time legal fees: $10,000

SDE = $150K + $120K + $15K + $5K + $10K = $300,000

A buyer would see $300K in total earnings available to them as the new owner-operator. At a 3x multiple, your business is worth roughly $900K.

Frequently AskedQuestions

Start with net income, then add back one owner's salary and benefits, interest, depreciation, amortization, and one-time or non-recurring expenses. For example, $150,000 of net income plus a $120,000 owner salary, $15,000 of owner health insurance, $5,000 of interest, and $10,000 of one-time legal fees gives SDE of $300,000.

Yes. SDE adds one owner's salary and benefits back to net income, because a buyer who runs the business will pay themselves out of those earnings. Only one owner's compensation is added back; pay for other working partners stays an expense unless the buyer would not need to replace that role. That add-back is the main difference between SDE and EBITDA.

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