What is SDE (seller's discretionary earnings)?
SDE is the profit figure most small businesses are actually priced on. Here is the definition, the formula, a worked example, and how buyers use it.
Direct answer: SDE, or seller's discretionary earnings, is the total pre-tax financial benefit a single full-time owner-operator gets from a business in one year. It equals net profit plus one owner's compensation, plus interest, taxes, depreciation and amortization, plus personal or one-time expenses run through the business.
The SDE formula
SDE = Net profit + Owner's salary and benefits + Interest + Taxes + Depreciation + Amortization + Non-recurring and personal expenses
Each add-back exists for the same reason: it is a cost the current owner chose, not a cost the business must carry. A new owner-operator can choose differently, so those amounts are added back to show the real earning power of the operation.
Worked example
| Line item | Amount |
|---|---|
| Reported net profit | $95,000 |
| + Owner's salary | $70,000 |
| + Owner's health insurance and vehicle | $14,000 |
| + Depreciation and amortization | $18,000 |
| + Interest on the seller's loan | $9,000 |
| + One-time legal settlement | $12,000 |
| SDE | $218,000 |
At a 3.0x multiple, that business would be valued near $654,000 before adjusting for inventory, working capital and debt.
What counts as a legitimate add-back
- One owner's compensation. Salary, payroll taxes and benefits for a single working owner. A second owner's pay is only added back if the buyer will not need to replace that role.
- Discretionary perks. Personal vehicle, travel, phone, family members on payroll above market rate.
- Non-recurring items. A lawsuit, a flood repair, a one-time rebrand.
- Non-cash charges. Depreciation and amortization — though you still have to fund real replacement capital expenditure.
What does not count
- Wages for staff the buyer must keep employing.
- Rent at below-market rates because the seller owns the building — normalize it to market rent instead.
- Recurring "one-time" costs that appear every year.
- Owner pay above one full-time role in a business that genuinely needs two managers.
Why SDE and not net profit
Small business tax returns are usually optimized to minimize taxable profit. Two identical businesses can report wildly different net profit purely because of how the owners pay themselves. SDE normalizes that, which is why brokers quote listings as a multiple of SDE.
Calculate SDE-based value for a real listing
Enter revenue, net profit, asking price and financing terms in the AcquireAI business acquisition calculator to get valuation range, debt service coverage, cash-on-cash return and payback period for a specific deal.
Frequently asked questions
What does SDE stand for?
SDE stands for seller's discretionary earnings — the total annual pre-tax benefit available to one full-time owner-operator.
Is SDE the same as cash flow?
Brokers often label SDE as "cash flow" or "owner benefit" on listings, but it is not free cash flow. SDE ignores capital expenditure, working capital changes, debt payments and the market salary of a manager, so real cash left over is lower.
What SDE range do businesses use SDE instead of EBITDA?
SDE is the standard for owner-operated businesses with roughly under $1–2 million of earnings. Above that, buyers switch to EBITDA because a hired manager, not the owner, runs the company.
How do I verify a seller's SDE?
Reconcile it to filed tax returns and bank statements, ask for the add-back schedule line by line, and reject any add-back you cannot trace to a document.