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Seller's Discretionary Earnings (SDE)
Total financial benefit a single owner-operator derives from a business annually, used primarily for valuing small businesses.
Formula
SDE = Net Income + Owner's Salary + Owner's Benefits + Non-cash Expenses + One-time Expenses + Interest + Depreciation
Or simply: SDE = EBITDA + Owner's Compensation + Personal Expenses Run Through Business
Definition
What is Seller's Discretionary Earnings?
SDE represents the total pre-tax earnings of a business before non-cash expenses, one-time costs, and owner benefits are deducted. It shows what a new owner-operator could expect to earn from the business.
Why SDE Matters
SDE is the standard valuation metric for businesses under $5M in revenue. Buyers multiply SDE by an industry-specific factor (typically 2-4x) to determine fair purchase price. Higher SDE means higher business value.
SDE vs EBITDA
SDE includes owner salary and perks, while EBITDA excludes them. For owner-operated businesses, SDE better reflects true cash flow. For larger companies with professional management, EBITDA is more appropriate.
Example
Small ecommerce business financials:
- Net Income: $120,000
- Owner's Salary: $80,000
- Owner's Health Insurance: $15,000
- Personal Vehicle Expense: $8,000
- Depreciation: $12,000
- One-time Legal Fees: $5,000
SDE = $120K + $80K + $15K + $8K + $12K + $5K = $240,000
At a 3x multiple, business value = $720,000
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