SDE (Seller's Discretionary Earnings)

SDE exists because small-business P&Ls are shaped by owner choices. One owner pays herself $150,000; another pays himself nothing and takes distributions. Their net profits differ wildly while the businesses are identical. SDE normalizes that: net profit $220,000, plus $90,000 owner salary, plus $12,000 of addbacks gives $322,000 of SDE. At 3.2x, the asking price is just over $1 million.

How to calculate a business's SDE

Start with pre-tax net profit from accrual books. Add back the owner's salary and payroll taxes, plus benefits like health insurance the business paid for the owner. Add interest, depreciation and amortization, since a buyer's financing and asset base will differ from yours. Then add discretionary and one-time items: the personal vehicle, the family phone plan, a one-off legal settlement, the trade show that was mostly a vacation. Subtract anything the buyer will have to pay that you didn't, like market rent if you've been using your own garage. The result is the business SDE a broker puts on the listing.

Worked version for a $1.4 million Shopify brand: net profit $180,000, owner salary $110,000, owner health insurance $14,000, depreciation $9,000, one-time website rebuild $22,000, personal travel run through the business $6,000. SDE: $341,000. At a 3.0x multiple the business lists at just over $1 million. The salary addback is the biggest line, which is why an owner who has been underpaying herself isn't creating value; the buyer's broker adds a market salary back in.

SDE vs EBITDA

Both strip out interest, taxes, depreciation and amortization. The difference is the owner. SDE adds back one full owner's compensation because the buyer of a small business is assumed to step into that role. EBITDA leaves a market-rate manager's salary in as a cost, because the buyer of a larger business will hire one. That's why SDE is used for owner-operated businesses under roughly $5 million and EBITDA takes over above it, and why the same business shows a higher SDE than EBITDA. Buyers convert between the two, so know which one a broker quoted before you compare multiples.

What a good SDE multiple depends on

Ecommerce brands typically trade at 2.5x to 4.5x SDE. The spread comes down to a handful of factors: revenue trend over the trailing twelve months, how much of sales runs through one channel or one SKU, whether the brand owns its customer relationship or rents it from Amazon, supplier concentration, and how well the numbers are documented. A brand with 30% year-over-year growth, five channels and clean accrual books gets the top of the range. A single-ASIN FBA business with declining reviews gets the bottom, no matter how big the SDE figure is.

Making SDE provable

Because every SDE dollar is worth three or four at exit, the cheapest value-creation work a seller can do is making SDE provable: accrual books, a maintained addback schedule and clean channel-level statements. Buyers pay premium multiples for numbers they can verify quickly and discount everything they have to reconstruct. The difference between claimed SDE and provable SDE is usually the difference between the multiple you were quoted and the one you close at.

Common questions

Is SDE the same as owner benefit or cash flow? Brokers use those terms loosely for the same idea. SDE is the standardized version, with a definition the International Business Brokers Association publishes, so use it when comparing listings.

Do I need accrual books to compute SDE? Yes, if you sell inventory. Cash-basis profit swings with purchase timing, and a buyer's quality of earnings team will restate it to accrual anyway. Better that the restatement carries no surprises. What verification looks like is covered in our QoE report guide.