Seller's Discretionary Earnings (SDE)

A cash flow metric used to value small businesses, calculated as net income plus owner compensation, benefits, and discretionary expenses.

Seller's Discretionary Earnings (SDE) is the primary cash flow metric used to value small businesses, particularly those with less than $1 million in earnings.

SDE Formula

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

SDE vs. EBITDA

MetricBest ForKey Difference
SDEOwner-operated businesses <$1MIncludes full owner compensation
EBITDALarger businesses with management teamsAssumes market-rate management

Why SDE Matters

For small businesses:

  • Owner compensation often represents 30-50% of profits
  • SDE shows true economic benefit to a working owner
  • More accurate for businesses where buyer will be the operator

Typical SDE Multiples

Business TypeSDE Multiple
Service businesses2.0-3.0x
Retail/restaurants2.5-3.5x
Manufacturing3.0-4.5x
SaaS/tech4.0-6.0x+

SDE Example

Net Income:           $150,000
Owner Salary:         $120,000
Owner Health Ins:      $15,000
Personal Auto:         $12,000
One-Time Legal:         $8,000
---
SDE:                  $305,000

Related Terms

ebitdaadd backmultiple

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