There’s this moment in business ownership—usually when you’re halfway through a cup of coffee or knee-deep in spreadsheets—when someone says:
“So, what’s your SDE?”
And suddenly, your mind spirals. You know your profit and loss. You might even know your EBITDA. But this one? SDE? It sounds simple, but let’s be honest—it’s not exactly part of the everyday language for most small business owners. Yet it should be.
Because understanding SDE—Seller’s Discretionary Earnings—isn’t just about prepping for sale. It’s about seeing your business in its most honest light. Without filters. Without fluff.
The Story Behind the Number
Let’s take a breath and break it down like two business owners talking shop at the end of the day. SDE, at its core, is what your business actually earns for you, the owner. But not just your salary. It’s your perks. Your write-offs. The little financial decisions that make running a business a blend of strategy and survival.
So, what does SDE mean in business? It means filtering out all the noise and asking: “If someone else took over this thing tomorrow, what would they walk away with?” That’s SDE. It’s clean, direct, and refreshingly transparent.
Why Your Net Profit Doesn’t Tell the Whole Truth
Net profit is nice, sure. It makes for a good line on the P&L. But here’s the catch: it’s not the full picture.
Let’s say you run a local print shop. Your net profit last year was $60,000. But wait—you also paid yourself a salary of $45,000. And you used the company car (worth $6,000 annually), covered your cell phone bill ($1,200), and paid for a one-time roof repair ($5,000).
Add it all up, and your actual discretionary earnings—the real benefit of owning this business—might be closer to $117,200. That’s your business SDE.
That number matters. A lot. Especially to someone considering buying your business.
Thinking of Selling Someday? Start Here.
If selling your business has ever crossed your mind—even if it was just a passing thought—SDE is the number to understand. It’s what buyers care about. And it’s how brokers, advisors, and even banks assess your company’s value.
But here’s the real kicker: waiting until the last minute to figure it out? Big mistake. Calculating your SDE a few weeks before listing is like cramming for a test you could’ve been preparing for all semester.
Get ahead of it. Track your add-backs. Keep clean records. Know your number.
The Difference Between SDE and EBITDA (Without the Jargon)
You’ve probably seen EBITDA tossed around in business circles. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s useful—especially for larger companies with management teams and investors.
But for smaller, owner-operated businesses? SDE is the gold standard.
So when someone asks what is SDE in business valuation, think of it like this:
EBITDA tells you how the business performs from an operational standpoint.
SDE tells you how the business performs for the owner.
See the difference?
A Real-World Example That Actually Makes Sense
Let’s paint a quick picture.
Sarah owns a small catering company. Her numbers look like this:
- Net Income: $40,000
- Owner’s Salary: $50,000
- Business vehicle (used for errands and kids’ soccer): $4,500
- Business trip that doubled as a family vacation: $3,000
- One-time expense for new kitchen equipment: $6,000
Now, to calculate her SDE:
$40K (net) + $50K (salary) + $4.5K (vehicle) + $3K (travel) + $6K (equipment) = $103,500
To a buyer, that’s the actual earning potential if they step into Sarah’s shoes. That number carries weight. It’s what makes or breaks offers.
Why SDE Isn’t Just for Buyers and Brokers
Here’s a truth most people overlook: understanding your SDE isn’t just about selling.
It’s about clarity. Control. Vision.
When you know your SDE, you can set better goals. You can benchmark more accurately. You can spot inefficiencies and growth opportunities that aren’t visible through standard accounting.
And honestly? It just feels good to know exactly what your business is giving back to you.
Common Mistakes to Avoid
Alright, so now you know the value of SDE. But it’s easy to get it wrong if you’re not careful. Some classic missteps:
- Overestimating add-backs (yes, your Netflix subscription doesn’t count)
- Underestimating what a new owner would need to spend to replace you
- Lumping in personal expenses that wouldn’t make sense to a buyer
- Failing to document one-time or non-operational costs properly
Honesty and transparency matter. Not just because it builds trust—but because inflated SDEs fall apart under due diligence. Keep it real.
SDE as a Strategic Tool
Let’s say you’re not selling for years. Maybe ever. Why still care?
Because SDE gives you a powerful tool to track performance. Think of it as your business’s “owner-benefit score.” It can be the metric that shows if you’re really building wealth—or just staying busy.
Use it during annual reviews. Share it with your accountant. Watch how it trends over time. You might just surprise yourself.
What Buyers Really Want to Know
When a buyer shows up, they’re not just thinking about your location or logo. They’re asking:
- Can I live on this income?
- Will I need to hire someone to replace the owner?
- How long will it take to earn back my investment?
Your SDE answers all of that in one simple figure. That’s the magic. That’s the clarity buyers crave.
Final Thought: It’s More Than a Number—It’s Your Narrative
Here’s what I’ve learned watching owners go through this process: calculating your SDE isn’t just financial—it’s emotional.
You see the decisions you made. The sacrifices. The smart plays and the wasteful ones. You see the story you’ve written, in numbers.
