SDE (Seller's Discretionary Earnings)

Seller's Discretionary Earnings (SDE) is an earnings metric used primarily to value small, owner-operated businesses where the owner plays an active role in day-to-day operations. SDE is calculated by adding the owner's total compensation (salary, bonuses, benefits, personal expenses run through the business) back to net income, along with interest, taxes, depreciation, amortization, and other one-time or non-recurring items.

SDE differs from EBITDA in that it adds back the owner's full compensation — not just the portion above market replacement cost. This reflects the reality that in a small owner-operated business, the buyer will either manage the business themselves (recapturing the owner's compensation as personal income) or hire a manager (in which case the market-rate management cost is already reflected in EBITDA).

SDE multiples for Canadian small businesses typically range from 2x to 4x SDE, compared to the 3x–8x EBITDA multiples common in larger transactions. Businesses with SDE above $500,000 often transition to EBITDA-based valuation as the business is large enough to be managed by a professional management team.

See also: EBITDA, Add-Back, Normalization, EBITDA Multiple, Business Valuation.