Financial term · Reviewed August 17, 2026
Seller’s discretionary earnings (SDE)
Seller’s discretionary earnings (SDE): A small-business earnings measure that may add back one owner’s compensation and selected discretionary or nonrecurring items. The SDE Business Valuation Calculator returns this figure from enterprise value = selected earnings metric × valuation multiple; equity value subtracts net debt. At that calculator’s documented worked-example inputs the estimated equity value is $2,050,000; holding every other input steady, moving EBITDA, SDE or earnings metric from $400,000 to $600,000 moves it from $1,550,000 to $2,550,000, a spread of $1,000,000.
SDE is the standard basis for valuing owner-operated small businesses, because it restates earnings as what a single working owner would actually take home. Buyers price against it and lenders underwrite against it. So the add-backs are where the entire negotiation happens.
| Term | Seller’s discretionary earnings (SDE) |
|---|---|
| Category | Business Finance |
| How it is found | Enterprise value = selected earnings metric × valuation multiple; equity value subtracts net debt |
| Worked example | Estimated equity value: $2,050,000 |
| Computed by | SDE Business Valuation Calculator |
| Related terms | 8 defined in this glossary |
Before you rely on it
What to check
Scrutinise every add-back individually.
The common error
Where people go wrong with seller’s discretionary earnings (SDE)
Accepting a list of add-backs at face value. A genuinely discretionary expense and a real operating cost relabelled as one produce valuations that differ by a multiple, and the difference is the buyer's money.
Worked through
Seller’s discretionary earnings (SDE) in plain numbers
A small shop reports a net profit of $90,000; the owner takes a salary of $60,000, runs a personal car through the business for $6,000, had a one-time legal bill of $4,000, and the books show $10,000 of depreciation and $5,000 of interest. Add back all of those: $90,000 + $60,000 + $6,000 + $4,000 + $10,000 + $5,000, giving SDE of $175,000. That is the total benefit a single working owner-operator receives from the business. If small shops in the field sell for about 2.5 times SDE, the asking price would be near $437,500; each add-back needs documentation, because a buyer will test every one.
Easily confused
Seller’s discretionary earnings (SDE) and its neighbours
SDE is not net profit, EBITDA or free cash flow; it is a small-business earnings measure that adds back one owner's compensation and selected discretionary or one-time items to net profit. EBITDA is used for larger businesses and typically assumes a paid manager, so it deducts a market salary for the owner's role. SDE suits owner-operated companies where the buyer will also work in the business. Free cash flow also subtracts capital spending and working capital changes. Which measure is used affects the multiple.
In real decisions
Where seller’s discretionary earnings (SDE) turns up
Business brokers and buyers use SDE to value small companies, often as a multiple. Sellers prepare it to justify a price; lenders review it to judge whether the business can support a purchase loan. Comparing SDE across similar businesses shows relative performance; owners can track it to understand what the business truly pays them beyond salary.
Know the edges
Where seller’s discretionary earnings (SDE) stops being reliable
Add-backs are judgments, and buyers challenge those without proof. Multiples vary widely by industry, size and risk. SDE ignores capital needs, and a business that needs constant reinvestment is worth less than its SDE suggests; it reflects one owner, so adjust if more than one works in the business. Have an accountant or valuation professional verify the figures before relying on them.
Quick answers
What people ask about seller’s discretionary earnings (SDE)
What add-backs are legitimate? Owner's salary and benefits, one-time costs and non-cash items such as depreciation, when documented. Personal expenses run through the business need proof. Buyers challenge unsupported items.
How do multiples work with SDE? Small businesses sell for a multiple of SDE that varies by industry and risk, often between two and four. Comparable sales and brokers give ranges.
How is SDE different from cash flow? SDE adds back non-cash items and owner benefits, but it does not subtract capital spending or changes in working capital. A buyer considers those separately.
Put it to work
How seller’s discretionary earnings (SDE) is calculated
At the SDE business valuation calculator’s worked-example inputs, estimated equity value is $2,050,000, estimated enterprise value is $2,500,000. Moving EBITDA, SDE or earnings metric from $400,000 to $600,000 moves that first figure from $1,550,000 to $2,550,000.
Open the SDE Business Valuation Calculator →
These are planning metrics, not audited accounting or a valuation opinion.
Related vocabulary
Terms used alongside this one
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Nearby in the glossary
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- All 174 defined termsThe complete Free Calculators Online financial glossary.