So, you’re thinking about selling your business. Exciting, right? But before you slap a price tag on your life’s work, there’s one thing you need to understand: Seller’s Discretionary Earnings (SDE). If you’ve never heard of SDE, don’t sweat it. By the end of this guide, you’ll know why it’s the ultimate financial metric for small business owners like you—and how it can make or break your sale.
Let’s cut through the finance jargon and break down SDE in plain English.
What the Heck is SDE?
Seller’s Discretionary Earnings (SDE) is like your business’s “take-home pay” on steroids. It’s the total cash your business generates in a year that’s available to YOU, the owner. Think of it as your salary + benefits + the business’s profit, all rolled into one number.
Big companies use metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to measure success. But for small businesses, SDE is where it’s at. Why? Because SDE includes your salary, that family member you employ, your health insurance, and even that “business trip” to Hawaii last year. Basically, it shows what a new owner could realistically pocket annually.
SDE vs. EBITDA: Why SDE Wins for Small Businesses
Imagine EBITDA as a fancy sports car—it’s sleek, but not practical for your daily errands. EBITDA ignores the owner’s salary and focuses purely on operational profits. That works for corporations with CEOs on payroll, but not for you, the owner who’s also the janitor, marketer, and customer service rep.
SDE, on the other hand, is the trusty pickup truck that gets the job done. It answers the golden question: “How much money does this business actually put in the owner’s pocket?”
Here’s the breakdown:
EBITDA = Revenue – Operating Expenses (excluding interest, taxes, depreciation, and amortization).
SDE = EBITDA + Owner’s Salary + Benefits + Non-essential Expenses (like your Netflix subscription paid by the business).
Bottom line: If you’re selling a small business, SDE is your MVP.
Why SDE is Your Golden Ticket When Selling
Buyers aren’t just buying your products or customers—they’re buying future earnings. SDE tells them exactly how much they could make yearly. Here’s why it matters:
It Justifies Your Asking Price
Buyers use SDE to calculate offers. Typically, small businesses sell for 2–4x SDE. The higher your SDE, the fatter your paycheck at closing.
It Shows the “Real” Profit
Let’s say your tax return shows a 50kprofit.But you also pay yourself $80k. A buyer needs to know the total benefit ($130k SDE) to see the true value.
It’s Flexible
SDE lets you “add back” one-time or personal expenses (like a lawsuit or your car payment), making your business look more profitable.
How to Calculate SDE (Without Pulling Your Hair Out)
Calculating SDE isn’t rocket science. Grab your profit & loss statement and follow these steps:
Start with Net Income
Find your business’s net profit (after taxes but before owner’s pay).
Add Back Owner’s Salary & Benefits
Include your salary, health insurance, retirement contributions—anything you pocket.
Add Back Non-Essential Expenses
These are costs a new owner might not have, like:
Family members on payroll (who don’t actually work).
Personal expenses (travel, gifts, your home office).
One-time costs (equipment repairs, moving offices).
Adjust for Depreciation/Amortization
These aren’t cash expenses, so add them back.
Example:
Net Income: $100,000
Your Salary: $70,000
Health Insurance: $12,000
Personal Car Lease: $6,000
One-Time Legal Fee: $10,000
Depreciation: $8,000
SDE = $100k+ $70k + $12k+ $6k + $10k+ $8k = $206k
Boom. That’s the number buyers care about.
5 SDE Mistakes That Could Tank Your Sale
Don’t let these blunders scare off buyers:
Forgetting Add-Backs
That $20k “business” vacation to Bali? If it’s not recurring, add it back!
Over-Inflating Your Salary
Paying yourself $200k in a business that nets $50k? Buyers aren’t dumb—they’ll see through it.
Ignoring Industry Multiples
Coffee shops sell for 2x SDE; tech firms might fetch 5x. Know your niche.
Hiding Expenses
Surprise costs post-sale = lawsuits. Be transparent.
DIY-ing Your Financials
Hire a pro to audit your SDE. It’s worth the $1k–$2k fee.
How to Pump Up Your SDE Before Selling
Want to boost your sale price? Here’s how to fatten your SDE:
Trim Personal Expenses
Stop running personal costs through the biz for 1–2 years pre-sale.
Cut Waste
Renegotiate rent, ditch unused software, fire that underperforming employee.
Raise Prices
Even a 5% price hike can significantly lift SDE.
Document Everything
Keep receipts and notes for every add-back. Buyers love proof.
Final Takeaway: SDE is Your Best Friend
If you’re selling your business, SDE isn’t just a number—it’s your leverage. It shows buyers the real earning potential and puts cash in your pocket.
Your Action Plan:
Fix the leaks (cut unnecessary costs).
Work with a broker to market your SDE effectively.
Remember, buyers aren’t just buying a business—they’re buying a paycheck. Show them a juicy SDE, and you’ll be sipping margaritas on the beach in no time. 🍹
Got questions? Drop them below or reach out to our team at Buy-Scale-Sell. We’re here to help you crush your sale!
Hi, I’m Heather.
I help people buy, scale, and sell businesses. Think of me as your “anti-corporate” guide to ownership.
If you like blunt truths, dry humor, and leaders who’d rather light a fire than follow a script… let’s talk.
Started my first company at 23.
Now have 5.
Learned 1,000,037 hard-earned lessons so you can skip the trial-and-error phase.
Current obsessions:
✅ Turning “boring” industries into wealth-building machines
✅ Helping ambitious people escape soul-crushing corporate cultures
✅ Proving you don’t need an Ivy League MBA to win at business
Let’s connect if:
-You want to own your future, not rent it
-You’ve ever been told you’re “too much” for corporate America
-If you are ready to work on your business not in your business.