What is SDE (Seller's Discretionary Earnings)?
A cash flow measure for valuing owner-operated businesses. Includes owner compensation because the buyer will step into that role.
Key Takeaways
- •SDE = Net Income + Owner Salary + Discretionary Expenses + Depreciation + Interest
- •Used for small, owner-operated businesses where buyer will work in the business
- •Differs from EBITDA by including owner's total compensation
- •Typical small business multiples: 2-4x SDE
SDE Definition
Seller's Discretionary Earnings (SDE), also called "Owner Benefit" or "Discretionary Cash Flow," is the total financial benefit to a working owner from the business. It's the preferred metric for valuing small, owner-operated businesses.
SDE assumes the buyer will personally operate the business, so it includes all owner compensation. If a buyer needs to hire a manager instead, you'd use EBITDA (which doesn't include owner salary).
SDE Formula
SDE = Net Income
+ Owner's Salary & Benefits
+ Owner's Personal Expenses
+ Non-cash Expenses (D&A)
+ Interest Expense
+ One-time/Non-recurring Items
SDE vs. EBITDA
The key difference: SDE includes owner compensation; EBITDA assumes owner is paid market salary.
| Aspect | SDE | EBITDA |
|---|---|---|
| Owner Salary | Included (added back) | Not included (expense) |
| Best For | Owner-operated, <$1M profit | Professionally managed |
| Buyer Type | Individual buyer/operator | PE, strategic acquirer |
| Typical Multiples | 2-4x | 3-8x+ |
Example Comparison
SDE Calculation:
| Net Income | $150,000 |
| Owner Salary | $100,000 |
| Owner Benefits | $25,000 |
| Depreciation | $15,000 |
| Interest | $10,000 |
| SDE | $300,000 |
EBITDA Calculation:
| Net Income | $150,000 |
| Depreciation | $15,000 |
| Interest | $10,000 |
| Taxes | $25,000 |
| EBITDA | $200,000 |
Same business, different metrics. At 3x, SDE value = $900K. At 5x, EBITDA value = $1M. The right metric depends on buyer profile.
Common SDE Add-Backs
Owner Compensation
- Salary and bonuses
- Health insurance
- Retirement contributions
- Payroll taxes on owner
Discretionary Expenses
- Personal vehicle expenses
- Travel/entertainment (personal portion)
- Family members not working full-time
- Above-market rent to self
Non-Cash / Financing
- Depreciation
- Amortization
- Interest expense
One-Time Items
- Legal settlements
- Major repairs (roof, HVAC)
- Moving expenses
- Extraordinary events
Document Everything
Buyers will verify add-backs. Have documentation ready: personal mileage logs, evidence of personal use, invoices for one-time expenses. Unsupported add-backs either get rejected or heavily discounted.
SDE Valuation Multiples
SDE multiples are typically lower than EBITDA multiples because they're used for smaller, more owner-dependent businesses.
| Business Type | Typical Multiple | Notes |
|---|---|---|
| Main Street (under $500K SDE) | 1.5-2.5x | High owner dependence |
| Lower Middle Market ($500K-$1M) | 2.5-3.5x | Some systems in place |
| Service Businesses | 2-3x | Relationship-driven |
| E-commerce | 2.5-4x | Location-independent |
| SaaS/Subscription | 3-5x+ | Recurring revenue premium |
When to Use SDE vs. EBITDA
Use SDE When:
- Owner works in the business
- Buyer will operate day-to-day
- Revenue under ~$5M
- Selling to individual buyer
- Significant owner perks/benefits
Use EBITDA When:
- Professional management in place
- Owner is passive or paid market rate
- Revenue over ~$5M
- Selling to PE or strategic buyer
- Business runs without owner
Frequently Asked Questions
When should I use SDE vs. EBITDA?
Use SDE for owner-operated businesses under ~$5M revenue where the owner is heavily involved in operations. Use EBITDA for larger businesses with professional management where the owner's salary is at market rate. The key question: would a buyer need to replace the owner with a manager?
What's a typical SDE multiple?
Small businesses typically sell for 2-4x SDE. A $300K SDE business might sell for $600K-$1.2M. Multiples increase with size, growth, recurring revenue, and lower owner dependence. Online businesses and SaaS can command higher multiples even at small scale.
What add-backs are most common?
Owner salary/benefits are always included. Common add-backs: owner's personal vehicles, cell phones, travel not strictly business-related, family members on payroll not working full-time, above-market rent to yourself, and one-time expenses like legal settlements or equipment purchases.
How do I prove add-backs to a buyer?
Documentation is key. Have records showing personal use of vehicles, invoices for one-time purchases, and evidence of above-market rent. Be prepared to provide tax returns, bank statements, and credit card statements. Buyers will verify everything—undocumented add-backs get discounted or rejected.
Related Terms & Resources
EBITDA
Comparison metric
EBITDA Multiple
Valuation methodology
Adjustment Worksheet
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