What does sde stand for in business: seller's discretionary earnings. It is the total financial benefit a single full-time owner-operator derives from a business in a year, and it is the measure small-business sales are conducted in. Understanding how it is built, and where the arguments happen, is worth more to a seller than any other piece of financial vocabulary in a sale.
How to calculate SDE, step by step
How to calculate sde: start from net profit, then add back interest, tax, depreciation and amortisation, then add back one owner's total compensation including salary, payroll taxes and benefits, then add back discretionary and non-recurring expenses that a new owner would not incur. What you are left with is what one working owner actually gets from the business. Calculate sde this way consistently across three years and the trend is often more persuasive to a buyer than the latest figure.
Seller discretionary earnings are constructed, so every step is argued
Seller discretionary earnings is a constructed number, and every construction step is negotiable. The owner's compensation add-back assumes one owner working full time, so a business run by two working owners must add back only one and cost the other as a hire. Discretionary expenses have to be genuinely discretionary rather than merely inconvenient. Non-recurring items have to be genuinely non-recurring, which a buyer tests by asking how many years running you have had a one-off. Sellers discretionary earnings claims that cannot be evidenced from records get removed, and each removal moves the price.
SDE vs EBITDA, and when each is used
Sde vs ebitda is largely a question of size and of who runs the business. SDE includes one owner's compensation and suits businesses where the buyer will work in the business themselves. EBITDA excludes owner compensation because it assumes a management team is paid for out of costs, which suits larger businesses bought by people who will not run them day to day. Applying an EBITDA multiple to an SDE figure, or the reverse, produces a number that is wrong by roughly the owner's salary, and it is a mistake that appears in real negotiations.
Questions people ask about sde meaning
What is SDE in business, and what does it stand for?
Seller's discretionary earnings: the total financial benefit one full-time owner-operator derives from the business in a year, and the measure small-business sales are conducted in.
What is seller's discretionary earnings, and how is it calculated?
Net profit plus interest, tax, depreciation and amortisation, plus one owner's total compensation, plus genuinely discretionary and non-recurring expenses a new owner would not incur.
What is the difference between SDE and EBITDA?
SDE includes one owner's compensation and suits owner-operated businesses; EBITDA excludes it and suits larger businesses run by paid management. Mixing the two misprices by roughly a salary.