SDE Calculator

What Is SDE?

Seller’s Discretionary Earnings (SDE) is the total financial benefit available to a single owner-operator of a business. It’s calculated by taking your net profit and adding back the owner’s total compensation, plus any discretionary or non-recurring expenses that wouldn’t continue under new ownership.

The formula is simple:

SDE = Net Profit + Owner’s Compensation + Discretionary Add-Backs

Buyers use SDE multiples to value businesses under approximately $5M in earnings. It’s the standard metric for small and lower-middle-market transactions because most businesses at this size have one owner who takes compensation in various forms (salary, distributions, perks, personal expenses through the business). SDE normalizes all of that into a single number.

SDE vs. EBITDA

The key difference: SDE includes the owner’s compensation; EBITDA does not.

SDE is the standard for owner-operated businesses under ~$5M in earnings. It assumes the buyer will be an owner-operator who replaces you. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is used for larger businesses where the owner has been replaced by a management team — or where a buyer plans to install one.

If your business has a full management team running day-to-day operations without you, an EBITDA-based valuation may be more appropriate — and will typically yield higher multiples. For a deeper dive, read our guide to how service businesses are valued.

Common Add-Backs

Add-backs are expenses that are real costs to the business today but wouldn’t exist (or would be different) under a new owner. Common add-backs include:

• Owner’s salary and benefits — The total package you take, including health insurance, retirement contributions, and payroll taxes on owner comp.
• One-time expenses — Lawsuits, equipment write-offs, relocation costs, or other costs that won’t recur.
• Personal vehicle expenses — Trucks, cars, fuel, and insurance run through the business for personal use.
• Personal travel and entertainment — Trips, meals, or memberships that are personal rather than business-critical.
• Personal insurance — Life, disability, or health insurance for the owner paid by the business.
• Above-market rent — If you own the building and charge the business more than fair market rent.
• Family on payroll — Compensation paid to family members who don’t meaningfully contribute to operations.
• Charitable donations — Owner-driven charitable giving through the business.
• Depreciation and amortization — Non-cash expenses that reduce reported profit but not actual cash flow.
• Interest expense — Debt that won’t transfer to the buyer (the buyer arranges their own financing).

Be honest with add-backs. Buyers and their accountants will scrutinize every line during due diligence. Only include expenses you can clearly document and justify.

What Affects Your SDE Multiple?

Your SDE is half the equation. The other half is the multiple a buyer applies to it. Here are the five biggest factors:

1. Industry — Some industries trade at higher multiples than others. HVAC and IT managed services typically command 3x–4.5x; general contracting and painting often trade at 1.5x–2.5x. See multiples for 57 industries.
2. Owner dependency — If the business can’t run without you, buyers see risk. Documented systems and a strong management team increase your multiple. Learn more about owner dependency.
3. Recurring revenue — Contracts, subscriptions, and maintenance agreements reduce buyer risk and command higher multiples. Read about recurring revenue and valuation.
4. Revenue trend — Consistent growth gets rewarded. Declining revenue compresses multiples, even if current SDE is strong.
5. Customer concentration — If one client accounts for more than 15–20% of revenue, that’s a red flag for buyers.