Free SDE Calculator

What Is Seller's Discretionary Earnings (SDE)?

Seller's Discretionary Earnings is the standard measure of a small business's true earning power. It represents the total financial benefit a single owner-operator receives from the business, including salary, profits, and personal benefits. SDE is the number business brokers, buyers, and SBA lenders use to determine what a small business is worth and whether a buyer can afford to purchase it.

How to Calculate SDE

The SDE formula is:

Start with the business's net income from the tax return. Add back the owner's W-2 salary or guaranteed payments. Then add back discretionary, non-cash, and non-recurring expenses that inflate costs beyond what a new owner would experience.

Common SDE Add-Backs Explained

Depreciation & Amortization

Non-cash accounting entries that reduce taxable income but don't represent actual cash leaving the business. Almost universally added back.

Owner Perks & Personal Expenses

Personal vehicle costs, meals, travel, health insurance, cell phone bills, and other expenses run through the business for the owner's benefit. These won't apply to a new owner (or the new owner will have their own).

One-Time or Non-Recurring Expenses

Lawsuit settlements, equipment purchases that won't repeat, moving costs, consulting fees for a one-time project. If it happened once and won't happen again, it's an add-back.

Interest Expense

The current owner's debt payments reflect their capital structure, not the business's earning power. A new owner will have their own financing.

Above-Market Rent

If the owner pays rent to themselves (or a related party) above fair market value, the excess amount is an add-back.

SDE vs. EBITDA: What's the Difference?

SDE includes the owner's salary as an add-back. EBITDA does not. SDE is the standard for businesses with one working owner (most small businesses under $1–2M in value). EBITDA is used for larger businesses where professional management is in place and the owner's salary is a legitimate operating expense. If you're a business broker working Main Street deals, SDE is your number.

Why SDE Matters for Business Valuation

Business valuation for small businesses is driven by SDE. The formula is simple: SDE × Industry Multiple = Estimated Business Value. A restaurant with $250,000 in SDE and a 2.5x multiple is worth roughly $625,000. The multiple varies by industry, growth trends, risk factors, and market conditions. Higher SDE means a higher valuation — which is why accurate SDE calculation matters.