What Is Seller’s Discretionary Earnings (SDE) and Why It Matters When Buying a Business
If you’re buying a business, there’s one number you can’t afford to ignore: Seller’s Discretionary Earnings (SDE).
SDE is the lens buyers use to see what a business really earns. It cuts through the noise of accounting tricks, add-backs, and owner perks to show how much cash flow the business generates for a single owner-operator.
Contents
What Is SDE?
Seller’s Discretionary Earnings = Net Profit + Owner’s Salary + Perks + One-Time Costs
In plain English:
- You start with the bottom line (net income)
- Add back anything the current owner took for themselves (salary, health insurance, car lease)
- Toss in one-time or non-essential costs (lawsuit settlements, new signage)
What’s left? A clean number showing what the business would earn for you if you stepped in tomorrow.
Why SDEs Matter When Buying a Business
Let’s say you’re eyeing a business showing $500,000 in annual revenue. Cool. But revenue doesn’t pay your bills — earnings do.
The seller tells you they take home $150,000 a year, but that includes them working full-time, driving a company car, and writing off a Hawaiian “business retreat.” You dig in, do the math, and land on an SDE of $120,000.
Now you can evaluate:
- Is that enough income for me?
- Is the asking price reasonable?
- Can I hire someone else to run it and still turn a profit?
Valuing a Business Based on SDE
Most small businesses sell for 1.5x to 3x their SDE.
So if SDE is $120,000:
- At 2x → Business is worth $240,000
- At 3x → Business is worth $360,000
Multiples can vary by industry, location, and risk. But unless there’s real estate or IP involved, don’t expect to pay 5x or more — and be skeptical if someone asks it.
Pro Tip: Don’t Skip Seller Financing
When asking prices seem steep, many buyers use seller financing — the seller lets you pay part of the price over time. It reduces your risk and forces the seller to keep the business solid during the transition. Smart sellers know this and are open to it.
Final Word
When buying a business, always ask: What’s the real SDE? Not the revenue. Not the hype. Not the dream.
Because SDE tells the truth: what this business is worth — to you.
