What is seller’s discretionary earnings (SDE)?
Published November 9, 2026
In short: SDE is a measure of the total financial benefit one working owner gets from a small business. Brokers use it to price businesses, and buyers use it to estimate what they could earn. It is only as reliable as the add-backs behind it.
The formula
SDE starts with the business’s pre-tax profit and adds back items that belong to the current owner rather than to the business itself:
- Net income before income taxes
- + Interest expense
- + Depreciation and amortization
- + The owner’s salary and benefits (for one working owner)
- + Personal, one-time or non-recurring expenses the business paid
- = Seller’s discretionary earnings
A worked example
This is an invented example for illustration only.
- Net income before taxes: $120,000
- Interest expense: $10,000
- Depreciation: $25,000
- Owner salary run through payroll: $60,000
- Owner’s personal vehicle paid by the business: $9,000
SDE = 120,000 + 10,000 + 25,000 + 60,000 + 9,000 = $224,000.
If the asking price is $672,000, the asking multiple is 3.0× SDE. A buyer who will not do the owner’s job themselves must also subtract what it costs to replace that labor, which can change the picture a lot.
Why buyers shouldn’t take SDE at face value
- It is a seller-prepared number. Every add-back is a judgment call, and sellers have an incentive to include as many as possible.
- It often comes from a P&L, not a tax return. The two can differ for good reasons (timing, accounting method) and for bad ones. See add-backs worth questioning.
- It ignores replacement labor. SDE assumes one owner works in the business. If you plan to hire a manager, that salary is a real cost.
- It is not cash flow. Capital spending, working capital needs and loan payments all come out of SDE before you see a dollar.
How to check an SDE figure
- Match the seller’s P&L to the business tax return for the same fiscal year, line by line.
- List every add-back and ask for evidence: invoices, payroll records, bank statements.
- Recompute SDE yourself from the approved add-backs only.
- Subtract the cost of replacing the owner, then test whether the remaining cash flow covers your loan payments with room to spare. Our SDE vs EBITDA guide covers when each measure is used.
Want this done on a real deal? A Verified SDE Report reconciles the seller’s P&Ls with their tax returns, judges each add-back, and checks debt coverage. See a sample report or get one for $99.
Educational information only, not accounting, tax, legal, lending or investment advice. Check any deal with your own CPA, attorney and lender.