Meaning of SDE in Business Valuation

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What Is the Meaning of SDE in Business Valuation?

Let’s keep it real:
If you don’t understand SDE, you’re either going to overprice your business and scare off buyers… or undervalue it and leave serious money on the table.

SDE, or Seller’s Discretionary Earnings, is the single most important number in small business valuation. And yet, most owners can’t explain what it is—let alone how to calculate it properly.

This guide is here to fix that.

What Is SDE—And Why Should You Care?

SDE = the true earning power of your business from the perspective of a hands-on owner.

It answers one simple question for a buyer:
If I buy your business and run it myself, how much money can I realistically take home every year?

Forget fancy accounting terms. This is about real cashflow.

For businesses under $5M in revenue—especially owner-operated ones—SDE is the metric buyers, lenders, and brokers use to determine value. Not revenue. Not net income. Not profit margins. SDE.

Why Business Brokers Use SDE (Not Just Net Profit)

Most business owners look at net income on their tax return and assume it’s the number that matters.

Wrong.

Net income is optimized for tax reduction. It’s full of write-offs, personal expenses, and one-time costs that don’t reflect the business’s actual financial performance.

That’s where SDE comes in. It strips away the noise and rebuilds a profit number that tells the real story of what the owner earns.

The SDE Formula (No Fluff)

Here’s the basic formula:

**SDE = Net Profit

• Owner’s Salary

• Personal/Discretionary Expenses

• One-Time Costs

• Non-Cash Expenses (Depreciation & Amortization)

• Interest and Taxes**

Let’s put it in plain English:

You add back anything that wouldn’t carry over to the new owner or isn’t part of the business’s normal operations moving forward.

SDE in Action: A Simple Example

Let’s say your business has the following numbers:

• Net Profit: $90,000

• Your Salary: $70,000

• Personal Car Expense: $6,000

• One-Time Marketing Campaign: $8,000

• Depreciation: $5,000

• Interest Expense: $3,000

• Taxes: $10,000

SDE = $90K + $70K + $6K + $8K + $5K + $3K + $10K = $192,000

That’s what a buyer sees as the real earning potential of your business.

Now we apply a multiple to that number to estimate valuation. That multiple is usually between 2x and 4x for most small businesses.

So your $192,000 SDE might translate into a sale price of $384K–$768K depending on the deal quality.

How SDE Drives Business Valuation

Here’s the bottom line:
No SDE, no valuation. No valuation, no deal.

Buyers (and their lenders) use SDE to:

• Compare your business to others

• Calculate their return on investment

• Understand how much debt they can service

• Decide whether they’re buying a cashflow machine—or a mess

As a seller, your goal should be simple:
Maximize and defend your SDE—because that’s what determines your payday.

What Business Buyers Look for in SDE

Buyers don’t just want a big SDE number. They want one that’s:

• Well-documented

• Repeatable year over year

• Not inflated with shady add-backs

They’ll ask:

• Are these expenses actually discretionary?

• Will I have to hire someone to replace the owner?

• Is the growth sustainable?

If your SDE looks inflated, sloppy, or unverifiable, they’ll either walk—or slash their offer.

Why SDE Works Best for Owner-Operated Businesses

SDE assumes the buyer is stepping into the owner's shoes. That’s why it doesn’t work for:

• Multi-owner or investor-run businesses

• Companies with outside management

• Larger businesses doing $10M+ in revenue

Those businesses use EBITDA instead, which doesn’t add back the owner’s salary or perks.

But if you’re running a smaller business and you're the face of operations, SDE is your valuation tool.

How to Prepare Your SDE for Sale

If you're asking “How do I sell my business?”, it starts here.

Here’s what we coach owners to do:

• Track all owner perks clearly — Don’t hide them. Document them.

• Separate business and personal expenses — If it’s mixed, you’ll have a hard time proving it.

• Clean up the books — Sloppy records destroy confidence.

• Avoid aggressive write-offs right before listing — You’re optimizing for value now, not taxes.

• Work with a business broker who knows how to recast — This is a deal-breaker. Don’t DIY it.

At Sailfish Equity Advisors, we’ve seen hundreds of deals fall apart because SDE was either wrong, inflated, or misunderstood. We don’t let that happen to our clients.

How Business Brokers Defend and Position SDE

You don’t just need someone who can run the numbers. You need someone who can defend them in front of buyers and their accountants.

That’s where we come in.

At Sailfish Equity Advisors:

• We dig deep into your books and recast your SDE the right way

• We help you present a clear financial story buyers can trust

• We ensure your valuation is built on real, defensible numbers

• We connect you with qualified buyers who understand value

We’ve sold over 1,000 businesses doing exactly this. We don’t fluff numbers. We position truth as value—and the market responds.

SDE and Timing: When’s the Best Time to Sell?

If your SDE is clean, growing, and not overly dependent on you, that’s your moment.

That’s when you’ll get the best multiple. That’s when you’ll attract the most buyers. That’s when you have leverage.

The worst time? When you’re tired, burned out, and the business is flat or declining. In that case, even a strong SDE might not save your valuation.

So think ahead. Start preparing your SDE 1–2 years before you plan to sell.

Final Thoughts: Know Your SDE, Know Your Exit

If you walk away from this article with one thing, let it be this:

Your SDE is your exit number. Period.

Don’t underestimate it. Don’t overinflate it. Get it right. Defend it. And use it to build the outcome you actually want.

Whether you’re selling this year or three years from now, understanding SDE is non-negotiable.

Why Work with Sailfish Equity Advisors?

• 25+ years of hands-on experience

• Over 1,000 businesses sold

• Experts in SDE recasting, defense, and positioning

• Confidential, strategic, no-BS approach

• Nationwide buyer network with real capital

• Mission-driven to protect your legacy and maximize your outcome

We know what it takes to sell a business because we’ve built, scaled, and sold our own. You’re not just hiring a broker—you’re hiring an operator, a strategist, and a coach.

Let’s turn your SDE into a life-changing exit.
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