SDE
Buy a BusinessSDE (Seller’s Discretionary Earnings) is the total economic benefit a single owner-operator receives from a small business in a year — net profit, plus the owner’s salary, personal expenses run through the business, one-time costs, and non-cash charges. It is the standard earnings measure for businesses under roughly $2 million in annual revenue because it captures what the business actually produces for its owner, not just what the tax return shows.
How it works. You start with net income from the tax return (or P&L), then add back: owner’s salary and payroll taxes, owner’s personal auto, health insurance, travel, and other discretionary expenses, non-recurring costs, depreciation, and interest. The resulting SDE is the cashflow available to a new owner to pay themselves and service acquisition debt.
| Line item | Amount |
|---|---|
| Net income (per tax return) | $80,000 |
| + Owner’s salary & payroll taxes | $60,000 |
| + Owner’s health insurance & auto | $12,000 |
| + Depreciation | $8,000 |
| + One-time legal settlement | $5,000 |
| SDE | $165,000 |
SDE is not audited GAAP earnings — it is reconstructed by the buyer (or their advisor) from tax returns and financials. Every add-back must be verified, and the seller’s story about why an expense is “discretionary” must hold up under scrutiny. This is exactly what a quality-of-earnings analysis checks.
For how SDE feeds into business valuation, see how to value a business. For verifying the numbers before you write a check, see due diligence and quality of earnings.