What Is Seller's Discretionary Earnings (SDE)? A Guide for Business Sellers

The primary measure of cash flow used to value small businesses — it adds the owner's compensation back into the earnings figure. EBITDA plays the same role for mid-size and larger businesses but does not add back owner salary.

Why it matters: SDE is the number almost every Main Street valuation ultimately comes back to, because it answers the question a buyer actually cares about: what does this business really put in an owner-operator's pocket? A seller who understands how SDE is built — and keeps clean records to support every add-back — walks into a sale with a defensible number instead of one that gets whittled down during buyer diligence. It's also the figure multiples get applied to when pricing a deal, so disputes over what belongs in SDE are, in effect, disputes over the actual sale price. Getting this number right, with documentation, is arguably the single highest-leverage thing a seller can do before going to market.

Example: A $1.2M-revenue landscaping business shows $180,000 in reported net income. After adding back the owner's $70,000 salary, $10,000 in health insurance, $15,000 in depreciation, and $12,000 in personal vehicle and phone expenses run through the business, SDE comes out to roughly $287,000 — the number a broker or advisor would actually use to price the business.

Both SDE and adjusted EBITDA add back depreciation, amortization, interest, and personal perks (auto, phone, travel). SDE typically carries more add backs than adjusted EBITDA, since smaller businesses tend to run more personal expenses through the company than larger, more institutionally run ones.

Related terms: Add Backs, Owner's Salary, Multiple, Business Appraisal