SDE Calculator

Understanding SDE: The Foundation of Business Valuation

Seller's Discretionary Earnings (SDE) represents the total financial benefit available to a working owner. It's the standard metric for valuing small businesses (typically under $5M in enterprise value) because it normalizes for the wide variety of ways owners compensate themselves.

SDE vs. EBITDA

You'll hear both terms in acquisition conversations:

• SDE: Used for owner-operated businesses where the buyer will be hands-on. Includes one owner's salary.
• EBITDA: Used for larger businesses with management teams in place. Assumes the buyer won't operate day-to-day.

For most small business acquisitions (under $5M), SDE is the standard. As you move into lower middle market territory ($5M+), EBITDA becomes more common.

Common Add-Back Categories

• Personal expenses: Owner's car, cell phone, travel, meals
• Family compensation: Salary paid to family members who don't actually work (or are overpaid)
• One-time expenses: Legal fees from a lawsuit, moving costs, equipment that won't recur
• Discretionary spending: Donations, sponsorships, country club dues
• Non-cash expenses: Depreciation, amortization (sometimes added back depending on deal structure)

What NOT to Add Back

• Legitimate business expenses that will continue
• Market-rate rent (even if paid to a related party)
• Expenses needed to maintain the current revenue level

The Valuation Formula

Business Value = SDE × Multiple

Multiples typically range from 1.5x to 4x for small businesses, depending on industry, growth, owner dependency, and deal structure. Use our Business Valuation Calculator to estimate your multiple.