Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Seller's discretionary earnings only means what it's supposed to mean once owner compensation and one-time items are genuinely normalized, because a business run by an owner who under-pays themselves looks artificially more profitable, and a valuation multiple applied to that inflated figure overstates what the business is actually worth to a new owner who has to pay a market-rate manager instead.
Before you rely on it
What to check
Confirm owner compensation was adjusted to a market-rate figure and one-time or personal expenses were genuinely added back, not just assumed away, before applying a valuation multiple to the resulting SDE figure.
The common error
Where people go wrong with SDE business valuation calculator
Applying a valuation multiple to raw reported profit without normalizing owner compensation. A business where the owner takes below-market pay looks more valuable than it really is to a buyer who has to pay someone else a real salary to run it.
Sensitivity evidence
How EBITDA, SDE or earnings metric changes the estimated equity value
| EBITDA, SDE or earnings metric | Estimated equity value | Estimated enterprise value |
|---|---|---|
| $400,000 | $1,550,000 | $2,000,000 |
| $450,000 | $1,800,000 | $2,250,000 |
| $500,000worked example | $2,050,000 | $2,500,000 |
| $550,000 | $2,300,000 | $2,750,000 |
| $600,000 | $2,550,000 | $3,000,000 |
Every input, tested
Which input moves the estimated equity value most
| Input | Tested from | To | Estimated equity value at each end | Swing |
|---|---|---|---|---|
| EBITDA, SDE or earnings metric | $450,000 | $550,000 | $1,800,000 to $2,300,000 | $500,000 (24%) |
| Selected valuation multiple | 4.50× | 5.50× | $1,800,000 to $2,300,000 | $500,000 (24%) |
| Debt | $540,000 | $660,000 | $2,110,000 to $1,990,000 | $120,000 (5.9%) |
| Cash | $135,000 | $165,000 | $2,035,000 to $2,065,000 | $30,000 (1.5%) |
Two variables at once
Estimated equity value by EBITDA, SDE or earnings metric and selected valuation multiple
| EBITDA, SDE or earnings metric \ Selected valuation multiple | 4.00× | 5.00× | 6.00× |
|---|---|---|---|
| $400,000 | $1,150,000 | $1,550,000 | $1,950,000 |
| $450,000 | $1,350,000 | $1,800,000 | $2,250,000 |
| $500,000 | $1,550,000 | $2,050,000 | $2,550,000 |
| $550,000 | $1,750,000 | $2,300,000 | $2,850,000 |
| $600,000 | $1,950,000 | $2,550,000 | $3,150,000 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| EBITDA, SDE or earnings metric | $500,000 |
| Selected valuation multiple | 5.00× |
| Debt | $600,000 |
| Cash | $150,000 |
| Estimated equity value | $2,050,000 |
| Estimated enterprise value | $2,500,000 |
Where the inputs come from
Seller's discretionary earnings is the profit available to one full-time owner-operator: net income plus the owner's salary and benefits, interest, depreciation, taxes and one-time expenses. It is the standard metric for small businesses where the owner works in the business. Business brokers publish typical multiples by industry, commonly around two to three times SDE for small firms. Debt and cash adjust to equity value.
When the result stops applying
SDE adds back an owner's compensation, so it overstates profit if the owner does the work of more than one person. Larger businesses with hired management are valued on EBITDA instead. Multiples depend on recurring revenue, customer concentration, growth and the reliability of financial records, which a simple calculator cannot capture.
What to compare it with
For businesses run by managers, use the EBITDA multiple valuation calculator, and cross-check with the discounted cash flow page. The profit margin and working capital pages show quality of earnings. Ask a business broker for sold-comparable data, and clean up the books for at least three years before selling.
People also ask
Frequently asked questions
What is seller's discretionary earnings?
The total financial benefit to one owner-operator: net profit plus owner salary, perks, interest, depreciation and non-recurring costs.
What multiple do small businesses sell for?
Commonly about two to three times SDE, though it varies by industry, size, growth and how dependent the business is on the owner.
When should I use EBITDA instead of SDE?
When the business has professional management and the owner is not the operator. Larger companies are usually valued on EBITDA.