What Does SDE Really Mean? A Down-to-Earth Guide for Business Owners and Buyers
Let’s be honest—when you first start digging into the world of business buying, selling, or even valuing your own company, the jargon can be overwhelming. EBITDA, net income, cash flow, multiples… the list goes on. But one term that pops up again and again—especially for small businesses—is SDE.
So, what does SDE mean and why does everyone from brokers to buyers to valuation experts care so much about it?
Let’s strip it back and walk through it in simple, real-world terms. No buzzwords. No math headaches. Just a clear, useful explanation of SDE—and why it might be the most important number you’re not quite clear on.
The Short Answer: SDE = Seller’s Discretionary Earnings
At its core, SDE is the amount of money a business owner actually takes home from their business each year. That’s the easiest way to think about it. It’s the profit the business generates for an owner who’s actively running the company full time.
Now, here’s where it gets a little more interesting—and useful.
When valuing small businesses, we don’t just look at net income or EBITDA (those are more common for bigger, investor-led companies). Instead, we use SDE because it reflects the total financial benefit to a working owner.
In other words, what does SDE mean in business? It means a clear picture of what the new owner can realistically expect to earn if they step into the current owner’s shoes.
But SDE Isn’t Just Profit—It’s Adjusted Profit
So let’s dig a little deeper.
Most businesses don’t show their true profitability on their tax return or P&L statement—especially small ones. That’s not because of anything shady, but because owners often run personal or non-essential expenses through the business. Perfectly legal, but it makes the numbers a little noisy.
Here’s a simplified version of how SDE is usually calculated:
- Start with the net income (profit after all expenses).
- Add back the owner’s salary.
- Add back non-cash expenses like depreciation and amortization.
- Add back interest and taxes.
- Add back any personal or discretionary expenses—like the owner’s car lease, personal travel, one-time legal fees, or even that season tickets package they write off as “client entertainment.”
By making those adjustments, you get a number that reflects the actual economic benefit to the current owner. That’s the SDE.
And if you’re buying a business, that’s your north star.
Why SDE Matters (a Lot)
Let’s say you’re thinking about buying a small business—a coffee shop, maybe. You want to know what kind of income it can generate for you, assuming you’re running the day-to-day.
Looking at just the net income might make the business look like it barely breaks even. But once you factor in the owner’s salary and personal expenses (a car, some travel, a family phone plan on the business account, etc.), you might find that the owner’s actually pulling in $120,000 per year.
That $120,000? That’s the SDE—and that’s the number most buyers and brokers base valuations on.
You might also be asking, “what does SDE mean in terms of pricing?” Well, in most small business sales, the valuation is based on a multiple of SDE. That multiple could be 2x, 2.5x, 3x… depending on the industry, the market, and the business’s risk profile.
So a business with an SDE of $100,000 might sell for $250,000 if the market supports a 2.5x multiple. See how that works?
Sellers: Know Your SDE Before You List
If you’re preparing to sell your business, understanding your SDE is critical. Not only does it help you justify your asking price, but it also helps you tell a clearer story to potential buyers.
This means cleaning up your financials, documenting all the add-backs (those discretionary expenses), and working with someone—like a broker or accountant—who knows how to calculate SDE properly.
The better prepared you are, the easier it is to win trust and command a higher price.
Buyers: Always Verify the SDE
If you’re on the buyer side, SDE is your guidepost—but don’t take it at face value.
Sellers and brokers might present SDE in the best possible light (of course—they’re trying to sell). It’s your job to review the financials, ask questions, and make sure the add-backs make sense.
Some expenses might be truly one-time or personal. Others might feel… a little generous. Ask for documentation. Review tax returns. And don’t be afraid to challenge add-backs that don’t pass the sniff test.
Because once you own the business, you’re the one counting on that SDE to pay your bills.
Final Thoughts: It’s Not Just a Number—It’s a Reality Check
SDE is more than just a financial metric—it’s a real-world indicator of what a small business is truly earning for its owner. And for people buying or selling businesses under $5 million or so in revenue, it’s the most practical way to cut through the noise and understand value.
So next time someone asks, “what does SDE mean in business?”—you’ll know exactly what to say.
It’s what the owner’s making today. And it’s what you could make tomorrow.
