Seller's Discretionary Earnings (SDE) is the most widely used metric for valuing small businesses — typically those with revenue under $5M and a single working owner. SDE represents the total economic benefit available to a full-time, working owner-operator before debt service, depreciation, and above-the-line owner benefits are removed.
How SDE Is Calculated
Start with net profit from the tax return or P&L. Add back: the owner's W-2 compensation, owner's health insurance, owner's retirement contributions, personal expenses run through the business, one-time or non-recurring expenses, and non-cash expenses like depreciation and amortization. The result is the total cash benefit the business provides to its owner. This is SDE.
SDE Multiples and Sale Price
Business sale prices are expressed as a multiple of SDE. A business generating $300,000 SDE selling at a 3x multiple has a sale price of $900,000. The multiple is determined by industry benchmarks, business risk factors, growth trends, and market conditions. Understanding your business's SDE is the foundation of any realistic valuation conversation.
SDE differs from EBITDA (used for larger businesses with multiple managers) in that EBITDA does not add back the owner's compensation. As businesses grow above $5M in revenue with hired management, EBITDA becomes the more relevant metric. Knowing which metric applies to your business and why is essential before any sale discussion.