Seller's discretionary earnings are the earnings figure an owner-run small business is valued on: the net income plus everything the owner takes out of the business or runs through it that a buyer stepping into the owner's seat will decide for themselves, the owner's whole salary and benefits, the interest, the depreciation and amortization, the personal expenses and the one-off costs. What are sellers discretionary earnings is therefore a question about the add-backs, and how to calculate SDE is the addition of them to the profit on the books. This page works it on the hub's example, states SDE vs EBITDA, and shows the SDE valuation at the multiple the owner enters; the free small business valuation tool on this site does the sum from your own figures, with no account, and publishes no multiple.
How to calculate SDE from the books
SDE equals net income plus the owner's salary and benefits plus interest plus depreciation and amortization plus personal expenses run through the business plus one-off costs, less any non-recurring revenue. On the worked books, $120,000 of net income plus $40,000 of owner salary and benefits, $15,000 of interest, $20,000 of depreciation and amortization, $5,000 of personal expenses and $10,000 of one-off legal costs, less $30,000 of a one-off contract, is $180,000 of SDE, the hub's example figure. Each add-back is a line the buyer will test, and the IRS Schedule C, linked below, is where a sole proprietor's profit and many of those items are reported; the calculator on this site takes each as its own input.
SDE vs EBITDA: one owner's salary apart
EBITDA adds back interest, taxes, depreciation and amortization; adjusted EBITDA adds the one-off and personal costs and the owner's salary above a market manager's; SDE adds the owner's whole salary, because the buyer of an owner-run business will take the seat rather than hire the manager. On the worked books, adjusted EBITDA is $230,000 with only the excess salary added back and SDE is $180,000 after the one-off contract is removed; the figures move with the assumptions, which is why the earnings figure and the multiple applied to it must be the same kind. The Bureau of Labor Statistics' occupational wage data is where the market manager's salary that separates the two is read.
The SDE valuation: SDE times the multiple you enter
Value equals SDE times the multiple you enter, plus inventory at cost and equipment at its agreed value. On the hub's example, $180,000 at 2.5 is $450,000, $486,000 with $36,000 of inventory, which is 2.7 dollars for every dollar of earnings once the stock is in; at 2.0 and 3.0 the earnings value is $360,000 and $540,000. The SDE multiple is the owner's or the buyer's, quoted or evidenced, and the hub publishes none; the SDE business valuation on this site is the sum at whatever multiple is entered, shown with the multiples either side, and the report tool turns the three into a range with a midpoint.
SDE in business: the add-backs a buyer will test
The owner's salary is the largest add-back and the least contested, because the buyer knows they will take it. The contested ones are the personal expenses, which need receipts that show they were personal; the one-off costs, which need a reason they will not recur; and the family members on the payroll at below or above market, which cut both ways. An owner who documents each add-back before the listing has an SDE figure that survives due diligence; one who presents a total has a negotiation about every line of it. The free small business valuation tool on this site keeps the add-backs as separate inputs for that reason, and the Small Business Administration's guide to selling a business covers what the buyer's diligence will ask for.
Questions people ask about seller's discretionary earnings
What are seller's discretionary earnings?
Net income plus the owner's whole salary and benefits, interest, depreciation and amortization, personal expenses run through the business and one-off costs, less non-recurring revenue: the earnings a buyer stepping into the owner's seat will actually control. $180,000 on the worked books.
What is the difference between SDE and EBITDA?
SDE adds back the owner's whole salary; adjusted EBITDA adds back only the salary above a market manager's. SDE suits an owner-run business whose buyer takes the seat; EBITDA suits one whose buyer hires the manager. Each takes its own kind of multiple.
How is an SDE valuation worked?
SDE times the multiple you enter, plus inventory at cost and equipment at agreed value. $180,000 at 2.5 is $450,000, $486,000 with $36,000 of inventory. The hub publishes no multiple.