So, you’re thinking about selling your business. Or maybe you’re on the hunt to buy one. Either way, you’re about to enter the thrilling (and sometimes confusing) world of small business valuations. And guess what keeps popping up in conversations with brokers, buyers, and advisors?
SDE.
Yep — those three little letters that seem to be tossed around like everyone automatically understands what they mean. If you’ve ever paused mid-conversation and silently asked yourself, “Wait… what is SDE?” — you’re far from alone.
Let’s Break It Down — Without the Jargon
SDE stands for Seller’s Discretionary Earnings. Sounds fancy, but at its heart, it’s just a way to answer one very important question: How much money does this business really make for its owner?
When someone asks what is sde, they’re really asking for the truest snapshot of a business’s earning potential under single ownership — after cleaning up the messy parts of accounting that usually get in the way. Think of SDE as a financial “do-over” that strips out the noise and gets down to what you’d actually walk away with as the owner.
The Need for a Clean Slate
Why do we need SDE in the first place? Because small business accounting can be… let’s just say, creative. Owners might run personal car payments through the business, take a below-market salary, or pay for their kid’s phone plan. All of that skews the numbers. It makes profit seem lower than it really is — and doesn’t reflect what the business can actually produce in income.
This is where sde meaning starts to click for most people. It’s not just about looking backward; it’s about creating a fair view of what the business can offer you, the new owner, assuming you’re taking over day-to-day operations. That includes your salary, your perks, and any of the “optional” expenses that the seller enjoyed but you may or may not choose to keep.
Here’s What Typically Gets Added Back
To calculate SDE, we usually start with net profit and then “add back” several expenses, including:
- Owner’s salary or wages
- Owner’s health insurance or benefits
- Personal or discretionary expenses (like travel, subscriptions, etc.)
- One-time, non-recurring costs
- Depreciation and amortization
- Interest and taxes
The goal? To reveal what the business could generate for a single full-time owner who is actively involved in operations. It’s like asking, “If I ran this business myself, how much could I expect to make per year?”
Pretty useful, right?
Why Buyers (and Sellers) Rely on It So Heavily
Let’s say you’re looking at a business that pulls in $250,000 in SDE. The asking price? $625,000. That’s a 2.5x multiple — which is pretty standard in many industries.
Now you’ve got a simple, understandable framework to evaluate whether the business is worth that much to you. Could you replicate those earnings? Is the risk worth the reward? That’s the real magic of SDE — it gives everyone a common language to start the conversation.
On the seller’s side, it’s a powerful tool for showcasing value. But only if it’s used honestly. Puffing up your SDE with weak or questionable add-backs? That’ll come back to bite you during due diligence.
That brings us to an important truth: understanding what is sde mean isn’t just helpful — it’s vital if you want to avoid surprises.
SDE vs. Other Metrics Like EBITDA
If you’ve spent time in the corporate world, you might be more familiar with EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s widely used for valuing larger companies, especially those with management teams already in place.
SDE is the cousin of EBITDA — but it’s tailor-made for smaller, owner-operated businesses.
The key difference? SDE includes the owner’s compensation. Because in a small business, the owner often is the CEO, the sales team, the bookkeeper, and sometimes the janitor too. Ignoring their salary just wouldn’t make sense.
When SDE Gets Murky
Here’s where things can go sideways: when SDE is bloated, poorly documented, or overly optimistic. Maybe the seller tries to add back vague expenses like “networking meals” or a “leadership retreat” that wasn’t actually discretionary.
This is why buyers need to scrutinize every line of the SDE calculation. Ask for receipts. Push back on questionable add-backs. If the numbers don’t make sense — or if they’re too good to be true — they probably are.
And if you’re a seller? Be transparent. Back everything up. Build trust by showing that your SDE is rock solid.
Knowing SDE Puts You Ahead of the Game
Whether you’re buying or selling, getting comfortable with SDE is one of the smartest moves you can make. It’s not just about knowing what your business is worth — it’s about understanding how others will view it when the time comes.
SDE isn’t fluff. It’s not just for accountants or brokers. It’s the lens that makes sense of all the other numbers. And when it’s done right, it can mean a smoother transaction, fewer surprises, and a stronger deal for both sides.
Final Thoughts: Don’t Wait to Learn This
If you’re a business owner, start tracking your SDE now — even if you’re not selling yet. It’ll help you run leaner, make smarter decisions, and be ready when opportunity knocks.