SDE Multiple

The multiple applied to a small business's seller's discretionary earnings to arrive at a purchase price, negotiated based on factors including size, customer concentration, revenue durability and owner dependence.

Example

A business with a 140,000 SDE priced at a 2.6x multiple has an implied purchase price of 364,000.

Important

The multiple is not a fixed industry number - it moves substantially with customer concentration and whether the business is owner-operated or already run by a paid manager.

Related terms

  • Seller's Discretionary Earnings (SDE) — A reconstructed measure of a small business's earnings that starts from reported net income and adds back the owner's salary and other discretionary or non-recurring items, used to price owner-operated businesses.
  • Customer concentration — The share of a business's revenue that comes from its largest few customers.
  • Illiquidity discount — The reduction in price a seller must accept to find a buyer for something that cannot be readily traded.

Lessons that explain it

  • The return is discretionary earnings, financed with debt the business itself has to service — Seller's discretionary earnings is a reconstructed number built from add-backs, and almost every small-business purchase is financed with debt the business's own cash flow is expected to repay - which makes the add-back schedule the single most consequential piece of arithmetic in the deal. (12 min)
  • The multiple is a discount for size, concentration and dependence on one person — There is no exchange setting a price here. The multiple applied to SDE is a negotiated number that moves with customer concentration, revenue durability and how replaceable the owner is - and it sits far below public-market multiples for reasons that have nothing to do with the quality of the business. (11 min)

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