SDE: What Is Your Business Worth?

What Is Seller's Discretionary Earnings (SDE)?

SDE is the most common metric used to value small businesses (under $5M in revenue). It represents the total financial benefit a single owner-operator receives from the business.

Formula: SDE = Net Profit + Owner's Salary + Owner's Benefits + Depreciation & Amortization + One-Time Expenses + Interest + Other Owner Perks

Why SDE, Not Just Profit?

Net profit on a tax return understates the true earning power of a business. Owners often run personal expenses through the business and minimize taxable income. SDE adds those back to show what a new owner could actually earn.

How Business Valuation Works

Small businesses are typically valued as a multiple of SDE:

| Industry | Typical Multiple | |----------|-----------------| | Service Business | 1.5–3x | | Retail | 1.5–2.5x | | Restaurant | 1.5–3x | | Ecommerce | 2–4x | | Franchise | 2–4x | | Tech / SaaS | 3–5x+ |

The multiple depends on risk, growth trajectory, owner dependency, and market conditions.

What Drives Higher Multiples?

Buyers pay more for businesses that are:

Less owner-dependent — Can it run without you? Documented processes and a strong team command higher multiples.
Growing consistently — 3+ years of revenue growth shows stability.
Diversified — No single customer should represent more than 15-20% of revenue.
Clean financials — Professional bookkeeping and clear records reduce buyer risk.
Recurring revenue — Subscriptions, contracts, and repeat customers are worth more than one-time sales.

Common Add-Backs Buyers Accept

Owner salary and bonuses
Health insurance, retirement contributions
Personal vehicle expenses
Owner's cell phone and travel
One-time legal fees, moving costs
Depreciation (non-cash expense)
Interest on business loans

What Buyers Won't Accept as Add-Backs

Expenses that a new owner would also incur
"Creative" accounting that inflates SDE
Revenue that depends entirely on the current owner's personal relationships

Connect to Your Bigger Picture

Your SDE connects directly to your DSCR — a buyer will need financing, and lenders will use your income to determine how much they'll lend. Use the DSCR calculator to see the deal from the buyer's perspective.

SDE Calculator