What Is Seller's Discretionary Earnings (SDE)?

If you're selling a small business, one number matters more than any other: Seller's Discretionary Earnings, or SDE. It's the foundation of how your business will be valued, and understanding it can mean the difference between getting a fair price and leaving money on the table.

The Simple Definition

SDE represents the total annual financial benefit that a single owner-operator could receive from your business. It answers the question: "If I bought this business and ran it myself, how much money would I actually make?"

What Gets Added Back

Start with your net profit (bottom line from your tax return), then add:

• Owner's salary and payroll taxes — Whatever you W-2 yourself
• Owner's health insurance — If paid by the business
• Personal vehicle expenses — Car payments, gas, insurance run through the business
• Personal travel — That "business trip" to Hawaii
• Family members on payroll — If they're not actually working
• One-time expenses — Lawsuit, major repair, or equipment that won't repeat
• Depreciation & amortization — Non-cash accounting entries

SDE vs. EBITDA

You might have heard of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Here's the difference:

• SDE — Used for small businesses where the owner is actively involved. Assumes the buyer will run it themselves.
• EBITDA — Used for larger businesses with professional management. Assumes the buyer will hire someone to run it.

The rule of thumb: if your business does under $1M in earnings, buyers will use SDE. Above that, they'll likely use EBITDA.

Why SDE Matters So Much

Your business value is calculated as SDE × a multiple. So if you can increase your SDE by $50,000 and your multiple is 2.5x, you've added $125,000 to your sale price.

This is why smart sellers clean up their financials before listing. Document all those add-backs. Stop running personal expenses through the business for a year or two before selling. Make your SDE clear and defensible.

Common SDE Mistakes

• Forgetting to add back expenses — Review every line item. Cell phone? Add it back.
• Adding back too much — Be honest. If you actually need that truck for deliveries, it's not an add-back.
• No documentation — "Trust me" doesn't work. Have records for everything you add back.
• Family employees — If your spouse does the books, that's real value. You can only add back the portion above fair market salary.