Seller's Discretionary Earnings (SDE)
Seller's Discretionary Earnings. Adjusted EBITDA plus one owner's total compensation. The standard earnings measure for owner-operated businesses.
In more detail
SDE answers a different question than EBITDA: not "what does this business earn" but "what is available to a single owner-operator who works in the business". It adds back one owner's full compensation, because the buyer stepping in will take that role and that pay. Smaller, owner-run businesses are usually quoted on SDE; larger ones that already run on hired management are quoted on EBITDA.
For example
Adjusted EBITDA is $410,000 and the owner's total compensation, including payroll taxes and benefits, is $150,000. SDE is $560,000. Note the multiple applied to SDE is lower than the one applied to EBITDA, so the two routes land in a similar place.
If you are selling
If you work in your business, SDE is probably the number buyers quote. Make sure your own pay is captured accurately, including benefits and payroll taxes.
If you are buying
SDE assumes one working owner. If you plan to hire a manager instead, subtract that salary before applying your own return expectations.
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