Seller's Discretionary Earnings (SDE) is a business's net profit plus the owner's salary and perks, interest, taxes, depreciation, and one-time or non-operating add-backs, the full economic benefit to one owner-operator. It is the cash-flow figure most Main Street businesses (under ~$5M) are valued and priced on.
How SDE is built
Start at the bottom of the P&L and add back what a new owner controls or won't inherit:
| Line | Amount |
|---|---|
| Net profit (tax return) | $180,000 |
| + Owner salary | $110,000 |
| + Owner health & auto perks | $18,000 |
| + Interest | $12,000 |
| + Depreciation | $22,000 |
| + One-time legal add-back | $8,000 |
| SDE | $350,000 |
At a median 2.7× SDE multiple, that $350,000 SDE implies roughly a $945,000 asking price.
Why it matters when buying a business
SDE is the denominator of your entire deal. The price is a multiple of SDE, and your loan's DSCR divides SDE (after an owner salary reserve) by the annual payment. Inflated add-backs pump up SDE and the price with it, which is exactly what a Quality of Earnings review is meant to catch. Know how each add-back was built before you trust the number.
