How to calculate seller's discretionary earnings (SDE)

When a small, owner-run business sells, the price is almost always a multiple of SDE — not revenue, and not the profit on the tax return. Get the add-backs right and you're negotiating from the real number.

Why SDE exists

Owner-operated businesses are run to minimise tax and to fund the owner's life, so the bottom line on the books rarely reflects what the business truly earns for one working owner. SDE restates profit as if a single owner-operator ran it.

That's exactly what a buyer of a small business is purchasing: one full-time owner's income plus the return on their investment. SDE is built to measure precisely that, which is why brokers and buyers anchor on it.

Start with net profit

Begin with the business's pre-tax net profit — the bottom line before income taxes. This is your base. Everything else is an adjustment to strip out the distortions of owner-run bookkeeping.

Use a full year, ideally the most recent twelve months, and be ready to show the same figures on the tax return or financial statements. Add-backs you can't document are add-backs a buyer will refuse.

Add back the owner's compensation

Add back one owner's salary and any personal benefits the business pays — because the buyer will replace that owner and take those earnings themselves. This is usually the single largest add-back.

Important: only one owner's compensation gets added back. If the business needs a second manager or pays a second working owner, that role's cost stays as a real expense, because the buyer still has to pay for it.

Add back interest, depreciation, and one-offs

Add back interest (the buyer will have their own financing), depreciation and amortisation (non-cash accounting entries), and any genuinely one-time costs — a lawsuit, a move, a one-off equipment write-off — that won't recur for the new owner.

Also add back clearly personal expenses run through the business, like a personal vehicle or a family phone plan, but only if they're legitimate and documentable. Aggressive, hand-wavy add-backs are the fastest way to lose a buyer's trust and the deal.

Turn SDE into a price

Once you have SDE, value is SDE × a multiple. Small owner-run businesses commonly trade around 2×–4× SDE, with the exact multiple driven by how transferable, stable, and growing the business is.

A business that runs without the owner, has recurring revenue, and clean books earns the top of the range. One that is the owner earns the bottom. The free valuation calculator below runs SDE and applies a range so you can see the spread before you set an asking price.

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