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What Is Seller Discretionary Earnings (SDE)?

A plain-English answer, and why it matters when you actually sell.

Short answer: Seller discretionary earnings, or SDE, is the total financial benefit a single owner-operator takes from a business in a year. It starts with net profit and adds back the owner's salary, owner perks, interest, taxes, depreciation, and one-time costs. SDE is the standard earnings basis for valuing smaller owner-run businesses, usually those under about $2M in earnings.

Why Seller Discretionary Earnings (SDE) matters when you sell

SDE exists because in a small business the owner and the business are financially blended. The owner draws a salary, runs personal costs through the company, and is the key employee. A buyer wants to know the total pool of money the business generated for that one person, because that is what they are buying. Add the salary back, add the perks back, and you get SDE.

SDE differs from EBITDA mainly by that owner-salary add-back. Use SDE for owner-operated businesses and EBITDA once there is a real management layer. Applying an EBITDA multiple to an SDE number, or the reverse, is one of the most common valuation errors and it can misprice a business by half.

Frequently asked questions

What is the difference between SDE and EBITDA?
SDE adds the owner's salary and perks back to earnings and is used for small owner-operated businesses. EBITDA does not add the owner salary back and is used once a business can run without the owner. The same business looks very different under each.
What SDE multiple do small businesses sell for?
Most small businesses sell for roughly 2 to 4 times SDE, higher when revenue is recurring or a real estate component is involved. Route-based and contract-based businesses sit at the top of the range.
How do I calculate my SDE?
Start with net profit, then add back owner salary, owner benefits, interest, taxes, depreciation, amortization, and any one-time or non-business expenses. WETYR builds this with you so it is defensible in diligence.

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