When you’re about to sell your business, someone’s going to ask you, “What’s your SDE?” If you’re not sure what they mean, you’re not alone. But once you understand SDE, you’ll have a much clearer picture of what your business is actually worth.
SDE stands for Seller’s Discretionary Earnings. Think of it as the total profit that’s available to the owner of the business—not just what shows up as “net income” on your tax returns.
Here’s why this distinction matters. On paper, your business might show $50,000 in net income. But that number doesn’t tell the whole story. Throughout the year, you’ve probably paid yourself a salary. You might have taken business trips, written off meals, covered your phone bill, or claimed other benefits that reduced your taxable income. A buyer taking over your business wouldn’t necessarily have all those same expenses—or they’d want to keep them, which means that money is essentially available as profit.
How SDE Is Calculated
The formula is straightforward: Start with your net income, then add back all the discretionary expenses that belong to the owner. Those typically include:
Owner salary or draw — whatever you’ve paid yourself Owner perks — vehicle allowance, phone, membership dues, anything personal that the business paid for One-time expenses — lawsuit settlements, emergency repairs, hiring and firing costs, anything that won’t recur Interest — money you paid to service debt Depreciation and amortization — non-cash accounting charges
Let’s use a real example. Say you own a restaurant. Your tax return shows $50,000 in net income. But you’ve been paying yourself a $30,000 salary, your health insurance is covered by the business (add back $8,000), you took a business trip that was somewhat personal (add back $2,000), and you had a one-time legal settlement (add back $2,000). Your true SDE is $92,000—nearly double your reported net income.
Why Buyers Care About SDE
A buyer is going to pay a multiple of your SDE. Most small businesses sell for 2 to 4 times SDE, depending on how stable and attractive your business is. A business with recurring revenue, strong customer diversification, and proven growth might command 3.5x to 4x. A business heavily dependent on the owner or with lumpy revenue might be closer to 2x.
Understanding your SDE before you list your business means you’ll know what ballpark price to expect—and you won’t be blindsided when a buyer asks about add-backs. You’ll be ready with documentation and a clear explanation of why each one is legitimate.
Ready to figure out what your business is actually worth? Start by calculating your SDE honestly and gathering the documentation to back it up. That’s the foundation of every successful sale.