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SDE (Seller's Discretionary Earnings) Method

The preferred valuation method for small, owner-operated businesses

Discuss SDE Method

What is SDE?

Seller's Discretionary Earnings (SDE) represents the total financial benefit a single owner-operator receives from owning and operating a business. It includes both the return on investment and the owner's salary.

Owner Benefits

Includes salary, benefits, perks, and personal expenses

Single Owner Focus

Designed for businesses with one primary owner-operator

Cash Flow Basis

Shows actual cash benefit available to the owner

SDE Calculation

Net Income$XXX,XXX
+ Owner's Salary$XX,XXX
+ Owner Benefits$X,XXX
+ Personal Expenses$X,XXX
+ Interest Expense$X,XXX
+ Depreciation$XX,XXX
+ One-time Expenses$X,XXX
= SDE$XXX,XXX

SDE vs EBITDA: Key Differences

SDE (Seller's Discretionary Earnings)

Best For:

  • • Small businesses (under $5M revenue)
  • • Owner-operated companies
  • • Single owner scenarios
  • • Family businesses

Includes:

  • • Owner's salary and benefits
  • • Personal expenses through business
  • • Owner perks and discretionary items
  • • Interest, taxes, depreciation
EBITDA

Best For:

  • • Larger businesses ($1M+ EBITDA)
  • • Management-operated companies
  • • Multiple owner scenarios
  • • Institutional buyers

Excludes:

  • • Management salaries (market rate)
  • • Normal operating expenses
  • • Only adds back owner excess
  • • Interest, taxes, depreciation

Typical SDE Multiples by Industry

Professional Services
Accounting Firms2.5x - 4x
Law Practices2x - 3.5x
Consulting2x - 4x
Engineering2.5x - 4x
Service Businesses
HVAC/Plumbing3x - 5x
Landscaping2.5x - 4x
Cleaning Services3x - 4.5x
Marketing Agency2x - 3.5x
Retail & Food
Restaurants2x - 3.5x
Retail Stores2x - 4x
Gas Stations3x - 5x
Franchises2.5x - 4x
Manufacturing
Light Manufacturing3x - 5x
Job Shops2.5x - 4x
Custom Products3x - 4.5x
Technology
Software/SaaS4x - 7x
IT Services3x - 5x
E-commerce2.5x - 4.5x
Healthcare
Dental Practices3x - 5x
Medical Practices2.5x - 4x
Veterinary3x - 5x

Multiple Factors

Actual SDE multiples depend on many factors including business size, growth trends, customer concentration, location, management systems, and market conditions. These ranges are general guidelines only.

When to Use SDE Method

Ideal Scenarios
  • • Small businesses (typically under $5M revenue)
  • • Single owner-operator businesses
  • • Owner heavily involved in daily operations
  • • Personal expenses run through the business
  • • Family-owned businesses
  • • Service-based businesses
  • • Lifestyle businesses
Not Suitable For
  • • Large businesses with professional management
  • • Multiple owner scenarios (partnership/corporation)
  • • Businesses with negative earnings
  • • Asset-heavy businesses (real estate, equipment)
  • • Highly regulated industries
  • • Businesses seeking institutional buyers
  • • Public company acquisitions

Common SDE Adjustments

Owner Compensation
  • • Owner's salary and bonuses
  • • Health insurance premiums
  • • Retirement contributions
  • • Life insurance premiums
  • • Company car expenses
  • • Cell phone and other perks
Personal Expenses
  • • Personal meals and entertainment
  • • Family vacation expenses
  • • Personal use of company assets
  • • Home office expenses (personal portion)
  • • Personal professional fees
  • • Excessive travel expenses
One-Time Items
  • • Legal settlement costs
  • • Equipment purchase (extraordinary)
  • • Professional fees (one-time)
  • • Bad debt (unusual amounts)
  • • Facility improvements (major)
  • • Training and startup costs

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