Meaning of SDE
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Why Sailfish Equity Advisors
With over 25 years of experience and 1,000+ business sales closed, Sailfish Equity Advisors is trusted by owners and buyers who want clarity, confidence, and results.
We don’t just list businesses—we position them for top-dollar exits. Our team has built and sold companies ourselves, so we understand how to extract and present real value through accurate SDE analysis.
From confidential prep to buyer negotiation, we guide every step with honesty, strategy, and a nationwide network of qualified buyers. If you want a partner who knows what your business is worth—and how to get it—we’re ready when you are.
Meaning of SDE: Seller’s Discretionary Earnings Explained for Buyers and Sellers
Whether you're asking “What’s my business worth?”, planning to sell in the next 12–24 months, or evaluating a listing with a business broker, there's one financial metric you’ll encounter almost every time: Seller’s Discretionary Earnings (SDE).
At Sailfish Equity Advisors, we’ve sold over 1,000 businesses across Florida and the U.S. Our mission is to help business owners and buyers make informed, strategic decisions—starting with understanding what SDE really means.
Let’s break it down in clear, simple terms so both sellers and buyers can make smarter decisions at the negotiation table.
What Is Seller’s Discretionary Earnings (SDE)?
SDE is a measure of a business’s true earning power. It represents the total financial benefit that a single owner-operator derives from the business annually.
In plain language: SDE is the money the owner gets to take home.
This includes:
Net profit (after expenses)
Owner’s salary
Discretionary or non-essential expenses
Personal perks run through the business
One-time or non-recurring costs
Interest, taxes, depreciation, and amortization (added back)
Why Is SDE Used in Business Sales?
SDE provides a standardized way to value small to mid-sized, owner-operated businesses. It creates an apples-to-apples comparison for buyers looking at different opportunities and allows sellers to present their businesses in the best light—while still remaining honest and accurate.
How Business Brokers Use SDE to Value a Business
As experienced business brokers, we don’t just take tax returns at face value. Our job is to work with the business owner and accountant to recast financials and produce an SDE that accurately reflects true profitability.
This step is critical in answering questions like:
“What’s my business worth?”
“Is this a fair price?”
“Am I overpaying for this opportunity?”
“How does this business compare to others?”
A Simple Example of SDE Calculation
Let’s say a business shows:
Net profit: $100,000
Owner’s salary: $75,000
Personal vehicle expense: $8,000
One-time legal cost: $12,000
Depreciation: $5,000
Interest payments: $4,000
SDE = $100,000 + $75,000 + $8,000 + $12,000 + $5,000 + $4,000 = $204,000
That $204,000 is what a buyer can expect to earn annually if they replace the owner and run the business similarly.
Why SDE Matters to Business Owners
If you’re selling your business, SDE is your value foundation. It’s what buyers use to assess how much they’re willing to pay. Typically, businesses are priced using a multiple of SDE—usually 2x to 4x depending on industry, growth, stability, and risk.
As a seller, you need to:
Maximize SDE: Trim unnecessary expenses, document add-backs, and clean up your books.
Justify your multiple: Growth potential, systems in place, and recurring revenue all command a higher multiple.
Work with an expert: The right broker will know how to position your SDE to attract serious buyers without overpromising.
Why SDE Matters to Buyers
If you’re buying a business, SDE tells you what kind of return you can expect from your investment—especially if you’ll be stepping into the owner’s shoes.
As a buyer, you need to:
Validate the SDE: Request backup documentation. Don’t rely solely on a broker’s spreadsheet.
Understand add-backs: Are they legitimate? Are they one-time, or could they recur?
Ask the right questions: What would your salary be? What’s the workload? Will you need to hire help?
SDE isn’t just about profit—it’s about lifestyle, workload, and risk.
Multiples and Valuation: What’s a Business Worth?
Most small businesses are priced using a multiple of SDE:
Main Street businesses (under $1M SDE): Typically 2.0x–3.0x
Lower Middle Market (over $1M SDE): 3.0x–5.0x or higher
Premium businesses: Well-documented operations, recurring revenue, and low owner involvement can push valuations even higher
The best time to sell a business is often when SDE is growing, the owner’s involvement is minimal, and financials are clean.
How Sailfish Equity Advisors Helps Sellers and Buyers Navigate SDE
At Sailfish Equity Advisors, we do more than crunch numbers. We help both sellers and buyers:
Understand and optimize SDE
Present businesses in a compelling, buyer-ready format
Perform buyer-side due diligence
Structure deals that reflect real-world value
With 25+ years of experience and a 100% success-based model, our firm is trusted by business owners across industries—from HVAC to marketing agencies, contractors to e-commerce.
Our team has been on both sides of the table. We’ve built, scaled, and sold companies ourselves, so we know what’s at stake.
Common Mistakes Around SDE (And How to Avoid Them)
Sellers:
Overinflating add-backs with personal expenses that aren't defensible
Not preparing financials until a buyer is interested
Ignoring non-monetary factors that affect valuation (e.g., owner involvement, customer concentration)
Buyers:
Not verifying the add-backs
Assuming SDE equals passive income
Overlooking working capital needs or equipment replacement costs
Final Thoughts: Why Understanding SDE Is Non-Negotiable
Seller’s Discretionary Earnings is more than a number. It’s a negotiation tool, a valuation anchor, and a trust-builder between buyers and sellers.
When calculated and explained properly, SDE can be the bridge between a smooth closing and a broken deal.
Work with a Trusted Business Broker
At Sailfish Equity Advisors, we guide sellers and buyers through every step of the process—with confidentiality, integrity, and clarity at the center.
Whether you’re selling your business now or simply exploring your options, understanding SDE is a key first step. We’re here to help you prepare, scale, and exit wisely.
Ready to learn what your business is really worth?
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