seller discretionary earnings
There’s a quiet moment in many entrepreneurs’ lives when they lean back, look at what they’ve built, and wonder: What’s it all worth? Maybe it’s the itch to retire. Or a tempting offer in your inbox. Or just sheer curiosity. But the question lingers—how do you actually measure the true earning potential of a business?
Here’s the thing: it’s not just about net profit. It’s not even about revenue. It’s about something a little more nuanced, a little more real-world. That something is called seller discretionary earnings—and if you’ve never heard of it, now’s the time.
It’s More Than Numbers—It’s the Life Behind the Ledger
If you’ve ever tried to make sense of financials while also wearing 17 hats in your business, you know one thing’s true: small business accounting isn’t always straightforward.
You’ve got your salary tucked into expenses. You’re writing off your phone plan, your car lease, that once-in-a-blue-moon business retreat in Vegas (sure, it was 80% business, right?). Those perks and one-offs paint a messy picture when all you look at is net income.
That’s why seller’s discretionary earnings meaning hits different. It doesn’t just ask, What did the business make? It asks, What did the owner actually take home—including all the things buyers care about?
In plain English: SDE reflects the total financial benefit a single full-time owner gets from the business. And when you’re valuing a business—or thinking about buying one—that’s what really matters.
A Quick Detour Into Why Net Income Isn’t Enough
Let’s break it down. You run a small manufacturing shop. The books say you made $80K in profit last year. But here’s the real picture:
- You paid yourself a salary of $60K.
- You ran your personal SUV through the business—worth another $6K in annual expenses.
- You wrote off $1,200 in meals and entertainment.
- You paid $4,000 for a one-time equipment fix.
So your SDE? It’s not $80K. It’s $80K + $60K + $6K + $1.2K + $4K = $151,200.
That’s your actual take-home benefit as an owner. That’s the number buyers want to know. That’s the number that makes or breaks deals.
The Art and Logic of SDE Calculation
Okay, so we’ve painted the picture. But what about the nuts and bolts? What exactly goes into an SDE calculation?
Here’s a basic framework:
- Start with net income (bottom line from your P&L).
- Add back your owner’s salary.
- Add back discretionary expenses—things like travel, car payments, meals, cell phone bills—anything not essential for a new owner.
- Add back non-recurring or one-time expenses (new website build, moving costs, legal disputes).
- Adjust for non-cash items like depreciation and amortization.
And voilà—you’ve got your SDE.
Now, keep in mind: you can’t just throw everything in there and hope for the best. Buyers (and brokers) will scrutinize your numbers. If you try to add back your dog’s grooming bill? Yeah, that won’t fly. Keep it real. Keep it defendable.
Why This Metric Is So Dang Important
SDE is more than just a valuation tool—it’s a trust-builder.
When you’re preparing to sell your business, you’re essentially saying: Here’s what this business can do for someone else. The more transparent, well-documented, and honest your SDE is, the more credible you become.
On the flip side, if you’re the one buying? You don’t care much about how the current owner splits hairs on tax deductions. You want to know what you’ll earn. SDE helps you estimate your return and determine if the business fits your lifestyle, your goals, and your financial expectations.
The Emotional Side No One Talks About
Here’s something you won’t read in finance textbooks: calculating your SDE can be oddly emotional.
When business owners see the true, raw number, it often sparks reflection. Maybe it’s pride. “Wow, I’ve built something truly valuable.” Or maybe it’s wake-up call. “Huh, I thought I was making more than that.”
Either way, it’s a moment of clarity. And whether you’re selling, scaling, or just taking stock—it’s a moment worth having.
One Owner, One Salary: Why SDE Doesn’t Scale Neatly
It’s worth noting—SDE assumes a single, full-time owner-operator. So if your business requires a general manager, or multiple owners drawing salaries, those costs need to be considered.
Let’s say you’re mostly hands-off and your GM runs the day-to-day. Their $90K salary wouldn’t be an add-back—it’s essential to operations. Which means your SDE gets adjusted downward.
This helps prevent the common mistake of inflating value for businesses that require more overhead than the owner realizes. It also ensures a buyer walks in with realistic expectations.
Real Talk: Can SDE Be Fudged?
Short answer: yes. But should it? No. And it won’t work.
We’ve seen listings where sellers claim crazy-high SDE numbers. But then the add-backs include questionable stuff—like their spouse’s salary (when they actually work full-time), or two years’ worth of “one-time expenses.”
Buyers aren’t dumb. They’ll ask for documentation. They’ll call out red flags. So yeah—be honest. Your future self (and your reputation) will thank you.
SDE and Valuation: The Multiple Magic
Alright, here’s where the rubber meets the road. Once you have your SDE, what’s next?
Valuation. Most small businesses are valued at a multiple of SDE—usually somewhere between 1.5x and 3.5x depending on industry, risk, growth potential, and how clean your books are.
So, if your SDE is $150K and your broker suggests a 2.5x multiple, you’re looking at a fair market value of around $375K.
Simple? Kind of. But only if your SDE is accurate and clearly presented.
The Bottom Line: Know It, Own It
Whether you’re five years out from selling or someone just cold-called asking to buy your business, knowing your SDE puts you in control. It gives you a clearer sense of your business’s health, its story, and its value.
And honestly, it’s empowering. Because once you stop guessing and start understanding what your business actually earns you—you can make smarter decisions. About pricing. About negotiating. About your future.
Final Thoughts: You Deserve to Know What You’ve Built
Too many business owners are out here grinding, surviving, even thriving—but without a real grasp of what their business is worth in personal return. SDE changes that.
It’s the missing link between your effort and your reward. It doesn’t sugarcoat. It doesn’t spin. It just tells the story of your business… from the owner’s perspective.
So go ahead—run your numbers. Calculate your SDE. Take a moment to see your business through fresh eyes. You might be surprised by what you find.
