Seller's Discretionary Earnings (SDE)

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.

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.