What is SDE? Definition, formula and example
This is for anyone reading a business-for-sale listing for the first time. By the end you will know what seller's discretionary earnings (SDE) means, how to work it out, and why two listings with the same "profit" can be worth very different amounts.
What SDE means in plain words
SDE is the money a business would put in your pocket if you owned it and ran it yourself. It starts from the profit on the tax return and adds back everything the current owner takes out or spends through the business. Salary, health insurance, a car, family phone bills, the owner's interest and tax costs. It also adds back costs that will not repeat, such as a one-time lawsuit.
Brokers use SDE for most "main street" businesses: the HVAC shop, the dental practice, the landscaping company. These are businesses where one owner works in the business full time. A business run by a hired manager is more often valued on EBITDA, which treats a manager's salary as a real cost.
The SDE formula
The formula is a list of add-backs on top of net profit:
SDE = net profit + owner's salary + owner's perks and personal expenses + interest + taxes + depreciation + amortization + one-time costs
One rule matters more than the arithmetic. SDE assumes ONE working owner. If two spouses both work full time and both draw a salary, only one salary is added back. The other is a real cost a buyer will have to pay a manager. Brokers and the SBA's lenders apply the same one-owner idea.
A worked example
Illustrative example: a $1.2M-revenue HVAC company with one working owner.
| Line | Amount | Note |
|---|---|---|
| Net profit on the tax return | $110,000 | Starting point |
| Owner's salary | $90,000 | Added back, one owner |
| Owner's health insurance and car | $18,000 | Perks paid by the business |
| Interest on the owner's truck loans | $7,000 | New owner may finance differently |
| Depreciation and amortization | $35,000 | Non-cash |
| One-time lawsuit settlement | $20,000 | Will not repeat |
| SDE | $280,000 | Sum of the lines above |
If similar HVAC businesses sell for 2.5 to 3 times SDE, this one would be listed somewhere between $700,000 and $840,000. The buyer then checks whether $280,000 is enough to pay themselves, pay the loan, and keep a cushion.
Where SDE shows up in a deal
You will meet SDE three times. First in the listing, where the broker's figure sets the asking price. Second in the bank's file: an SBA lender rebuilds SDE from the tax returns and decides how much debt the business can carry. The SBA describes its 7(a) loan program, which most small buyers use. Third at closing, when the price is split across assets on IRS Form 8594.
A good buying process rebuilds SDE from the tax returns, not from the broker's spreadsheet. A good selling process does the same before the listing goes live, so every add-back has a receipt.
Common mistakes
- Counting two salaries. Two working owners means one add-back, and the second person's job must be filled.
- Add-backs with no proof. "Owner's travel, $25,000" needs the credit card statements. If the trips were sales calls, they are a real cost.
- Mixing SDE and EBITDA multiples. A 3x multiple of SDE and a 3x multiple of EBITDA give very different prices for the same business. Ask which one the broker used.
- Forgetting the manager. If you will not work in the business, subtract a market salary before you value it.
- Using one great year. Lenders and buyers want three years. A spike in the last year should be explained, not just priced.
Questions people ask
What is the difference between SDE and EBITDA?
SDE adds back one owner's full salary and perks. EBITDA leaves a market salary for the manager in the costs. SDE is therefore higher, and is used for smaller owner-run businesses.
What is a normal SDE multiple for a small business?
Many main street businesses trade between 2 and 4 times SDE, with the multiple rising for size, growth and a business that runs without the owner. Multiples differ by industry, so compare with sold businesses in the same trade.
Does the owner's salary count as profit in SDE?
Yes. SDE assumes the buyer will replace the owner and keep that salary, so one owner's pay is added back to profit.
Can I trust the SDE in a listing?
Treat it as the seller's claim. Rebuild it from three years of tax returns and ask for proof of every add-back before you offer a price.
Sources
Pober, M. (2026). What is SDE? Definition, formula and example. Acquisitions.com. https://acquisitions.com/blog/what-is-sde/
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