SDE (Seller's Discretionary Earnings) Method
The preferred valuation method for small, owner-operated businesses
Discuss SDE MethodWhat 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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