Seller’s Discretionary Earnings (SDE)
What Is SDE — And Why It’s the Most Important Number in Your Business Valuation
If you’re thinking about buying or selling a business, you’ve probably heard the term SDE (Seller’s Discretionary Earnings) thrown around — but very few business owners truly understand what it means or how dramatically it impacts the price of a company.
At Baker Business & Tax Services, SDE is one of the first numbers we calculate when helping clients evaluate a potential acquisition or prepare their business for sale.
Let’s break it down in plain English.
What Is SDE?
Seller’s Discretionary Earnings (SDE) represents the total economic benefit the owner receives from the business in one year.
It answers the buyer’s real question:
“How much money will I personally make if I own and operate this business?”
SDE is not the same as net profit. It adjusts financial statements to reflect the true cash flow available to a working owner.
How SDE Is Calculated
Here is the standard formula we use for small-to-mid sized businesses:
SDE =
Net Profit
+ Owner Salary / Guaranteed Payments
+ Payroll Taxes on Owner Pay
+ Owner Health Insurance & Retirement Contributions
+ Personal or Discretionary Expenses run through the business
+ One-Time / Non-Recurring Expenses
+ Excess Rent or Owner Perks
Common Add-Back Examples
CategoryExampleOwner CompensationW-2 wages, guaranteed paymentsBenefitsHealth insurance, SEP/Solo 401(k)DiscretionaryMeals, auto, cell phone, travelOne-TimeLegal fees, software migrations, equipment purchasesAbove-Market ExpensesRent paid to owner above market value
Example: Business Valuation Using SDE
Let’s say a small accounting firm has the following numbers:
ItemAmount
Net Profit$185,000
Owner Salary$90,000
Payroll Taxes on Owner$6,900
Health Insurance$12,000
Retirement Contributions$15,000
Personal Expenses$8,500
One-Time Software Setup$5,000
SDE Calculation
$185,000
90,000
6,900
12,000
15,000
8,500
5,000
= $322,400 SDE
How Buyers Determine Value
Most accounting firms sell at 2.5x – 4.5x SDE, depending on:
Recurring revenue
Staff in place
Owner dependence
Client concentration
Documented systems
If this firm sells at 3.5x SDE:
$322,400 × 3.5 = $1,128,400 estimated value
Why Clean SDE Matters
Improper SDE calculations cost business owners hundreds of thousands of dollars at sale:
Personal expenses not tracked
Owner salary buried in expenses
One-time costs not identified
No add-back documentation
At Baker Business & Tax Services, we normalize your financials so your business is positioned to command the highest possible multiple.
Thinking About Buying or Selling?
Whether you are evaluating a potential acquisition or preparing your firm for sale in the next 1–5 years, understanding SDE is critical.
We help business owners:
✔ Calculate true SDE
✔ Prepare valuation worksheets
✔ Identify add-backs
✔ Improve valuation multiples
Contact Baker Business & Tax Services today to schedule a confidential business valuation review.