When people talk about buying or selling a business, they often throw around acronyms like EBITDA, ROI, and SDE as if everyone should know what they mean. But let’s be honest — unless you live in the world of business valuations, those letters can sound like financial gibberish. Among them, though, one stands out as both practical and personal: SDE.
It’s not just another line on a balance sheet. SDE (Seller’s Discretionary Earnings) is the heartbeat of small business valuation — the number that tells the real story of how much a company earns for its owner. And yet, many entrepreneurs, even seasoned ones, don’t fully understand what it represents or why it matters so much when it’s time to sell.
So, let’s slow down, pour a metaphorical cup of coffee, and unpack this in plain English.
The Real Meaning Behind SDE
To start, let’s answer the question: what is sde in business?
SDE stands for Seller’s Discretionary Earnings, and it represents the total financial benefit a single owner-operator receives from running their business. In simple terms, it’s the money the owner actually puts in their pocket — including salary, perks, and any expenses that a new buyer might not necessarily incur.
If that still sounds abstract, here’s a real-world example. Imagine you run a small HVAC repair company. On paper, your net income might be $120,000 a year. But you also pay yourself a salary of $50,000, drive a company truck that doubles as your personal vehicle, and occasionally expense your phone and gas. When you add all that back in, your actual benefit — your SDE — might be closer to $180,000.
That number is what buyers look at when deciding what your business is worth. It’s the clearest window into how much profit someone could reasonably expect to make if they took over.
Breaking Down the Components
Now that we’ve put a name to it, let’s dig into what goes into SDE. At its core, it starts with your net profit — the bottom line after taxes and expenses. But then, you add back several things, including:
- The owner’s salary or compensation
- Non-essential personal expenses (like your vehicle, travel, or cell phone)
- One-time or non-recurring costs (like a big repair or legal fee that won’t happen again)
- Interest, taxes, depreciation, and amortization (the same adjustments used for EBITDA)
Once those are added back, you get a cleaner, more accurate reflection of what the business truly produces for its owner.
And that’s why SDE is so powerful. It doesn’t just measure performance; it measures lifestyle — how much money a new owner could make and what kind of financial freedom the business can provide.
The Meaning in Practice
Here’s where the concept gets real. The seller’s discretionary earnings meaning isn’t just about math; it’s about perspective.
When you think about selling a business, you’re not just selling assets or customers — you’re selling the income potential. SDE bridges the gap between raw numbers and lived experience. It takes the subjective — the owner’s personal involvement, the way they run the business — and turns it into something objective.
Buyers use SDE to compare different opportunities. A small cleaning company with $250,000 in revenue and $100,000 in SDE might actually be more attractive than a bigger firm with twice the sales but only $80,000 in SDE. It’s not about size. It’s about efficiency — how much cash flow the business generates for its owner.
That’s why, in most small business sales (typically those under $5 million), SDE is the gold standard metric. It’s simple, transparent, and practical.
Why SDE Is So Important for Valuation
Let’s be honest: valuing a business isn’t science, it’s art. Sure, there are formulas, but behind every number lies human judgment — risk, trust, potential, and emotion.
Still, SDE provides the foundation. Most small businesses sell for a multiple of their SDE, usually between 2x and 4x. That means if your SDE is $200,000, your company might be worth anywhere from $400,000 to $800,000 depending on its stability, industry, and growth prospects.
Of course, buyers don’t just look at the number in isolation. They want to know how reliable it is. Are those add-backs legitimate, or did the seller get creative? If your SDE includes too many “questionable” adjustments, you’ll lose credibility — and potentially thousands off your asking price.
When SDE and EBITDA Diverge
People often confuse SDE with EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and while they sound similar, they serve different purposes.
EBITDA is typically used for larger companies that have management teams in place and operate beyond the direct involvement of the owner. It’s a more corporate measure of profitability.
SDE, on the other hand, assumes the owner is actively working in the business. It’s personal. It’s about what an individual owner can expect to earn by running it themselves.
That distinction might seem small, but it changes everything when it comes to valuation.
So, What Does SDE Stand For in Plain Terms?
If we strip away the accounting jargon and industry lingo, what does sde stand for is really this: financial clarity.
It’s the truth beneath the numbers. It’s how buyers and sellers meet on common ground, seeing a business for what it really is — not just what it looks like on paper.
It’s also empowerment. For owners, calculating SDE gives you perspective. It forces you to step back and ask, “What is my business actually worth to me — not emotionally, but financially?”
And for buyers, it’s a way to gauge opportunity. If a business offers a strong, verifiable SDE, it’s often a safer bet — one that reflects genuine earning potential rather than creative accounting.
The Emotional Side of SDE
There’s also something quietly emotional about calculating SDE. For many owners, it’s a reminder of everything they’ve built — the long nights, the risks, the compromises. Seeing those numbers laid out can be validating.
But it can also be eye-opening. Some business owners realize they’ve essentially built themselves a job rather than an asset — where the business can’t function without them. Others discover their company has untapped potential that could make it far more valuable under the right buyer.
Either way, SDE is a mirror. It reflects both the health of the business and the effort behind it.
The Takeaway: More Than Just a Number
At the end of the day, SDE is about understanding your business in a language the market speaks. It’s not just a valuation formula — it’s the story of how your work translates into income and opportunity.
If you’re planning to sell, start cleaning up your books now. Separate personal expenses. Keep detailed records of adjustments. Transparency builds trust — and trust sells businesses faster and for more money.