Seller's Discretionary Earnings (SDE) Calculator

What Is Seller's Discretionary Earnings?

Seller's discretionary earnings, commonly called SDE, is a measure of the total financial benefit a business provides to a single owner-operator. It starts with net income and adds back not only the standard items — interest, taxes, depreciation, and amortization — but also the owner's total compensation, including salary, benefits, and perks. The result represents the total cash flow available to a new owner who would run the business themselves.

SDE is the most common valuation metric for small businesses — typically those with revenues under $5 million and a single working owner. EBITDA is more commonly used for larger businesses with professional management teams, where the owner is not personally doing the work. If you are a business owner who works in your business every day, SDE is likely the more relevant metric for your situation.

The Formula

SDE = Net Income + Interest + Taxes + Depreciation + Amortization + Owner's Total Compensation + Discretionary and One-Time Items

How SDE Differs from EBITDA

The key difference between SDE and EBITDA is the treatment of owner compensation. EBITDA adds back interest, taxes, depreciation, and amortization — but it leaves owner compensation in as an expense, on the assumption that a buyer would need to hire a professional manager to replace the owner's role.

SDE adds back the owner's entire compensation package because the assumption is different: the buyer is going to run the business themselves and will capture that compensation directly. In other words, SDE asks "what does this business put in the owner's pocket each year, total?" rather than "what does this business earn before financing and accounting adjustments?"

For this reason, SDE multiples are typically lower than EBITDA multiples — usually in the 2x to 4x range for small businesses — because SDE itself is a larger number that already includes the owner's pay.

What Goes Into Owner's Total Compensation?

Owner compensation for SDE purposes includes more than just the salary on the W-2. It includes:

The owner's salary and any guaranteed payments if the business is an LLC or partnership. The employer's share of payroll taxes on that salary. Health insurance premiums paid by the business for the owner and owner's family. Life insurance premiums paid for the owner's benefit. Auto expenses for owner's personal or mixed-use vehicle. Cell phone and other personal expenses run through the business. Retirement plan contributions made on behalf of the owner. Any other personal benefit flowing through the business that would not continue under new ownership.

Adding all of these together gives you the true economic benefit the current owner receives from the business — which is what a buyer is actually acquiring.

A Worked Example

A residential painting contractor has the following financials for the trailing twelve months:

Net income: $210,000 Add back: Interest expense: $18,000 Add back: Income taxes: $52,000 Add back: Depreciation and amortization: $35,000 EBITDA: $315,000

Owner compensation add-backs:

• Owner W-2 salary: $120,000

• Employer payroll taxes on salary: $9,180

• Health insurance premiums: $18,000

• Owner auto expenses: $14,400

• Cell phone: $1,800

• Owner retirement contributions: $12,000

• Total owner compensation: $175,380

Discretionary and one-time add-backs:

• One-time equipment repair: $22,000

• Total one-time items: $22,000

SDE = $315,000 + $175,380 + $22,000 = $512,380

At a 2.5x multiple: $512,380 x 2.5 = $1,280,950 At a 3x multiple: $512,380 x 3.0 = $1,537,140 At a 3.5x multiple: $512,380 x 3.5 = $1,793,330

What Multiple Should You Use for SDE?

SDE multiples for small businesses typically fall between 2x and 4x, with most transactions in the 2.5x to 3.5x range. The multiple reflects the same quality factors as EBITDA multiples — business risk, growth trajectory, customer concentration, management depth, and transferability — but the range is compressed because the buyer is accepting more personal risk by stepping into an owner-operator role.

Businesses that are heavily dependent on the current owner's relationships, skills, or reputation trade at the lower end. Businesses with documented systems, trained staff, and customer relationships that are not tied to the owner personally trade at the higher end.

SDE and the Transition to EBITDA

As businesses grow and the owner steps back from day-to-day operations, the appropriate valuation metric shifts from SDE to EBITDA. The inflection point is typically around $1 million to $2 million in SDE, or when the business has a management team capable of operating without the owner. At that point, buyers begin to think about the business as an investment rather than a job, and EBITDA multiples — which are generally higher — become more applicable.

Understanding where your business sits on this spectrum helps you think clearly about what it would take to move from a 3x SDE valuation to a 5x EBITDA valuation — and whether the steps required to get there are worth taking before a sale.