What Are Seller's Discretionary Earnings?
Seller's Discretionary Earnings (SDE) measure the total financial benefit a single owner-operator extracts from a business. It takes net income and adds back the owner's salary, personal expenses run through the business, and non-cash charges. SDE is the standard valuation metric for businesses under $5M in annual revenue.
Formula
SDE = Net Income + Owner's Salary + Owner's Benefits + One-Time Expenses
+ Non-Cash Expenses + Interest + Depreciation
Example:
Net Income: $80,000
Owner's Salary: +$120,000
Owner's Health Ins: +$15,000
Owner's Car Lease: +$8,000
One-Time Legal Fee: +$12,000
Depreciation: +$5,000
SDE: = $240,000
SDE vs EBITDA
| Metric | Adds Back Owner Comp? | Best For |
|---|---|---|
| SDE | Yes | Small businesses with active owners |
| EBITDA | No | Larger businesses with management teams |
The dividing line is roughly $5M revenue. Below that, buyers assume they will replace the owner, so SDE reflects true earning potential. Above that, EBITDA is used because management is a cost of operations.
Valuation Using SDE
Business Value = SDE × Multiple
| Business Type | SDE Multiple |
|---|---|
| Low-growth service business | 1.5x – 2.5x |
| Content/affiliate site | 2x – 4x |
| SaaS (small, < $1M ARR) | 3x – 5x |
| SaaS (growing, $1M+ ARR) | 4x – 8x |
SDE in AI-Run Companies
AI-run companies create a fascinating edge case for SDE. If the business has zero employees and the "owner" contributes minimal time (because AI runs operations), the add-back for owner compensation represents nearly pure profit. An AI-run business earning $300K revenue with $20K in AI costs has an SDE approaching $280K.
On EvolC, SDE is used to value smaller AI-run companies where the business essentially runs itself. For investors, a high SDE with minimal owner involvement signals a truly autonomous business.