If you’ve ever tried to figure out the value of a small business—whether you’re buying one, selling one, or just plain curious—you’ve probably stumbled across the term SDE. It’s one of those acronyms that gets tossed around like everyone’s supposed to just know what it means. But let’s be honest—it can feel a bit fuzzy if you’re not an accountant, broker, or knee-deep in business valuation work.
So, let’s break it down. In plain English. No MBA required.
The Basics: What Does SDE Actually Stand For?
SDE stands for Seller’s Discretionary Earnings. Sounds fancy, but it’s actually a pretty intuitive concept. At its core, SDE meaning refers to the true earning power of a business as experienced by the current owner. It’s the money a full-time owner-operator puts in their pocket every year from running the business.
It includes the company’s net profit—but it doesn’t stop there. SDE also adds back certain expenses that might not continue under new ownership. Think: the owner’s salary, perks, non-essential travel, one-time purchases, or even your cousin’s “consulting” gig that no longer makes sense after a sale.
Why? Because those are considered discretionary—expenses that a new buyer might handle differently (or not have at all).
Why It’s So Crucial in Small Business Transactions
If you’re evaluating a public company, you’re probably focused on EBITDA or net income. But for small, owner-run businesses, SDE is the gold standard. It paints a fuller picture of what the owner is truly pulling out of the business, and it gives potential buyers a sense of what they could earn if they stepped in and ran it themselves.
That’s where the nuance kicks in. SDE is less about cold, hard math and more about practical reality.
In simple terms, sde meaning business is all about understanding what a buyer can reasonably expect to make, assuming they plan to work in the business full time. That’s important—because the value of the company often hinges on that number.
Most brokers, appraisers, and acquisition advisors use a multiple of SDE to price businesses. So if a coffee shop has an SDE of $120,000 and the market multiple is 2.5x, you’re looking at a valuation of around $300,000.
What Goes Into SDE?
Here’s a quick breakdown of what typically gets added back to calculate SDE:
- Owner’s salary or draw
- Personal perks (car lease, health insurance, phone, travel)
- One-time or non-recurring expenses (legal fees, rebranding)
- Depreciation and amortization
- Interest payments and taxes
But hold on—it’s not always cut-and-dry. This is where good bookkeeping (and honest conversations) matter. Some business owners get a little creative with what they categorize as “discretionary,” which can inflate the SDE on paper. A sharp buyer will always ask for documentation and justification for every add-back.
So, What Is SDE in Business, Really?
At the end of the day, what is sde in business boils down to this: it’s a normalized version of profit that tries to show what a hands-on owner could earn if they took over operations tomorrow.
Think of it like this: if you bought a landscaping company and stepped in to run the crew, book the jobs, and manage the customers—you want to know how much money you’d actually make, after all expenses, without any fluff. That’s what SDE aims to show.
It’s not perfect. It requires interpretation. But for small businesses (usually under $5 million in revenue), it’s still the most practical and relevant number out there.
Buyers and Sellers: What to Watch Out For
If you’re a seller, understanding your SDE helps you price your business realistically and tell a clear story. If your numbers are messy or your add-backs seem like a stretch, you’ll scare away serious buyers—or get lowballed. Clean books and a transparent SDE calculation can go a long way.
If you’re a buyer, don’t just take the broker’s SDE at face value. Ask for backup. Look at tax returns, P&Ls, and bank statements. Watch for red flags like excessive “consulting” fees or personal vehicles running through the business. Some add-backs are totally legit; others are more… optimistic.
Final Thought: SDE Isn’t the Whole Picture—But It’s a Big Piece
Seller’s Discretionary Earnings doesn’t tell you everything. It won’t reveal the growth potential, the brand’s reputation, or the market trends affecting the business. But it does give you a starting point. It tells you what the business has been earning for the current owner, and that’s a critical piece of the valuation puzzle.
Whether you’re dreaming of buying your first small business, prepping to sell one you’ve built from the ground up, or just trying to wrap your head around how valuations actually work—understanding SDE is a solid place to start.