SDE (Sellers Discretionary Earnings) is the total financial benefit an owner receives from operating their business, including both reported profits and personal benefits. SDE applies specifically to owner-operated businesses where the company cannot function without the founder for six months to a year.

SDE differs from EBITDA because it includes owner benefits that would not continue under new ownership. These benefits include excess owner salary above market rate, personal expenses run through the business, and discretionary costs. SDE provides the most accurate picture of cash flow available to a new owner in small business acquisitions.

Start with your business's net income, then add back all owner benefits and discretionary expenses. The formula is: Net Income + Owner Salary + Owner Benefits + Interest + Taxes + Depreciation + Amortization + Discretionary Expenses.

Owner benefits include salary above market replacement cost, personal vehicles on company books, personal travel coded as business expenses, and family members on payroll who aren't essential to operations. A documented restaurant example showed reported net income of $64,000 but true SDE of significantly higher after adjusting for two brothers' salaries when only one manager was needed post-acquisition.

SDE multiples scale with business size, creating significant value jumps at key thresholds. According to Equidam data: $50,000 SDE commands 1.0-1.25x multiples ($50,000-$62,500 value), $100,000 SDE commands 2.0-2.7x ($200,000-$270,000), $500,000 SDE commands 3.0-4.0x ($1,500,000-$2,000,000), and $1,000,000 SDE commands 3.25-4.25x ($3,250,000-$4,250,000).

The critical insight: the jump from 1x to 2x multiples occurs between $75,000 and $100,000 SDE, making businesses just above the $100,000 threshold significantly more valuable. Doubling SDE from $50,000 to $100,000 creates a 4x increase in total business value.

Use SDE for owner-operated businesses where the buyer will be the day-to-day operator. Use EBITDA for businesses with professional management where the buyer will not run daily operations.

SDE businesses typically trade at 1.5-4x multiples and are common in the $500K-$15M deal range. EBITDA applies to larger, managed businesses where a market-rate manager runs operations and the owner's personal benefits aren't relevant to the buyer's economics. Converting SDE to EBITDA is essential when institutional buyers evaluate deals, as they focus on professional management metrics.

Add back owner salary above market replacement cost, personal expenses run through the business, and non-essential family member salaries. If an owner pays themselves $300,000 but a replacement manager costs $100,000, the $200,000 difference is an add-back.

Personal expenses include vehicles on company books, personal travel coded as business expenses, entertainment not essential to operations, and discretionary costs. Also add back one-time expenses like workers' compensation refunds, above-market rent payments, and building maintenance costs that wouldn't continue under new ownership.

Normalization adjusts SDE to reflect sustainable earnings under new ownership. Start with reported financials and systematically identify owner benefits, personal expenses, and one-time items that won't continue.

Example normalization: reported $64,000 net income became significantly higher SDE after adjusting for dual owner salaries (only one manager needed), rent above market rate ($132K reduced to $100K market rate), and eliminating building maintenance pass-throughs. This process reveals true cash flow available to buyers and supports accurate valuation multiples.

Larger businesses command higher multiples because they offer better economies of scale, reduced owner dependency, and more attractive acquisition targets. The documented scale shows dramatic value increases: $50,000 SDE at 1.0x versus $500,000 SDE at 3.0x represents a 15x difference in business value despite only 10x difference in earnings.

This scaling creates mathematical opportunities for roll-up strategies, where acquirers buy smaller businesses at lower multiples and benefit from higher multiples as combined entities reach larger scale. The jump from 1x to 2x multiples between $75,000 and $100,000 SDE represents the most significant value threshold for small businesses.