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.

Example

Reported net income of 40,000 plus an owner's salary add-back of 65,000 and several smaller add-backs produces an SDE of 140,000.

Important

SDE assumes the owner's own labour is unpaid and available to be added back, which makes it a different measure from EBITDA and unsuitable for direct comparison against it without adjustment.

Related terms

• Owner-Operator — A business owner who personally works in the business full time, rather than employing a manager to run day-to-day operations on their behalf.
• EBITDA — Earnings before interest, tax, depreciation and amortisation - in practice, operating profit with the depreciation and amortisation charge added back.
• 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.

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)

All 578 terms in the Investing glossary