When an owner asks what their business is worth, the first question back is usually about earnings, not revenue. For most small businesses, the earnings number that matters is seller's discretionary earnings, or SDE.
What SDE measures
SDE is the total financial benefit one full-time owner gets from the business in a year. It starts with net profit and adds back expenses that a new owner wouldn't necessarily have:
- The owner's salary and payroll taxes, for one owner
- Owner benefits, such as health insurance or a vehicle run through the business
- Interest, depreciation, and amortization
- One-time expenses, like a lawsuit settlement or a major one-off repair
- Personal expenses paid through the business
The result shows a buyer what they could expect to earn if they stepped into your role.
How SDE becomes a price
A buyer applies a multiple to SDE. The multiple reflects risk: how dependable those earnings are once you're gone. Steady earnings, a team that runs daily operations, a spread-out customer base, and clean records push the multiple up. A business that leans on the owner or a few big customers pulls it down.
Larger companies, where a paid manager would run things, are usually priced on EBITDA instead, which subtracts a market salary for that manager.
Why add-backs need proof
Every add-back has to hold up in due diligence. Buyers and lenders will ask for documentation, and add-backs that can't be supported come back out of the number. Clean, separate books are the easiest way to protect your SDE, and your price.
Want to know where your business stands? Take the free readiness assessment or request a free valuation.
This article is general information, not legal, tax, or financial advice.