Equity & Ownership

Seller Discretionary Earnings

Understand seller's discretionary earnings (SDE) — the standard measure for valuing small, owner-operated businesses (roughly EBITDA plus the owner's salary and discretionary expenses) — which captures the total benefit to a single owner-operator, and why you must subtract a manager's salary if you won't run it yourself.

  • Beginner
  • 16 min total
  • 13 chapters

What decision this helps you make: How SDE values a small owner-operated business — and why it's right only for someone who will run it themselves.

What this topic is

Seller's discretionary earnings (SDE) is the standard earnings measure for small, owner-operated businesses: roughly EBITDA plus the owner's salary and discretionary/personal expenses added back — capturing the total financial benefit a single full-time owner-operator derives from the business.

Why it matters

It's the relevant number for a buyer who'll run the business themselves (what they could earn and take out). Small businesses are valued at a (usually low) multiple of SDE. But it assumes a single owner-operator — subtract a manager's salary if you won't run it — and its add-backs can be inflated.

Who should learn it

Anyone buying, selling, or valuing a small owner-operated business.

What you will understand

  • Understand SDE as EBITDA plus the owner's salary and discretionary expenses added back
  • See why it captures the total benefit to a single owner-operator
  • Know small businesses are valued at a (usually low) multiple of SDE
  • Subtract a manager's salary if you won't run it yourself, and scrutinize the add-backs

Prerequisites

Common misconception

"A small business's value is just its profit times a multiple." For a small owner-operated business, the right measure is seller's discretionary earnings (SDE) — roughly EBITDA plus the owner's salary and discretionary/personal expenses added back — because the owner's salary and perks aren't a true cost; they're part of the benefit a new owner-operator could take. SDE captures the total benefit to a single owner-operator. But it's the right measure only if you'll run the business yourself — if you'll hire a manager, you must subtract that manager's salary — and the add-backs can be inflated, so scrutinize them.