SDE, Seller's Discretionary Earnings, is the total financial benefit a single owner-operator gets from a small business in a year. It equals net profit + the owner's salary and perks + interest + taxes + depreciation + amortization + one-time/non-business expenses (the "add-backs"). Small businesses are commonly valued as a multiple of SDE. Example: $300,000 of SDE at a 3× multiple implies a ~$900,000 price.
How SDE is built up
Tax returns understate what a business really earns for its owner, because owners run salary and personal perks through it and non-cash items like depreciation depress profit. SDE reverses those to show the true owner benefit.
| Line | Amount |
|---|---|
| Net profit (from tax return) | $120,000 |
| + Owner's salary | $110,000 |
| + Interest | $18,000 |
| + Depreciation & amortization | $32,000 |
| + Owner perks & one-time costs | $20,000 |
| SDE (total owner benefit) | $300,000 |
Verify these add-backs, that's what a quality of earnings review is for. Estimate value with the valuation calculator.
SDE vs. EBITDA
The key difference is owner compensation. SDE adds back one full owner's salary because it measures the benefit to a single owner-operator. EBITDA does not add back owner pay, it assumes the business pays a market-rate manager. SDE fits smaller owner-run businesses; EBITDA fits larger companies with professional management.
SDE answers "what will this business pay me to run it?" EBITDA answers "what does it earn on its own?"
Turning SDE into a price
Multiply SDE by an industry multiple, often roughly 2×, 4× for small businesses. A $300,000 SDE business at 3× is ~$900,000. The multiple rises with growth and stability, and falls with heavy customer concentration or dependence on the current owner. Compare against industry multiples and the valuation guide.
Frequently asked questions
Seller's Discretionary Earnings, the total yearly benefit to a single owner-operator: net profit plus owner salary and perks, plus interest, taxes, depreciation, amortization, and one-time costs added back. Small businesses are valued as a multiple of SDE.
SDE adds back one full owner's salary because it measures the benefit to a single owner-operator; EBITDA doesn't and assumes a market-rate manager. SDE suits smaller owner-run businesses, EBITDA larger managed companies.
Multiply SDE by an industry multiple, often ~2×, 4× for small businesses. $300,000 SDE at 3× implies ~$900,000. The multiple depends on industry, growth, customer concentration, and owner dependence.
