Glossary
Seller’s Discretionary Earnings (SDE)
Seller’s Discretionary Earnings (SDE) is a measure of a small business’s profit that adds back one full owner’s salary and benefits on top of the usual EBITDA adjustments, so a buyer can see the total financial benefit available to a single owner-operator. It is the standard earnings metric for owner-run businesses, where one person’s compensation and lifestyle costs are tangled up in the numbers. Our transaction advisory team calculates it as part of every small-deal Quality of Earnings report.
SDE vs. EBITDA
EBITDA strips out interest, tax, depreciation, and amortization and normalizes for one-time items. SDE goes one step further and also adds back the compensation of a single owner-operator, because in a small business that owner is both the manager and the workforce. The practical rule:
- Use SDE for owner-operated businesses a buyer intends to run themselves.
- Use EBITDA for businesses with a management team in place that will stay after close.
The gap matters. When the owner is hands-on and leaving, a number presented as EBITDA is often really SDE, because the work that owner does has to be replaced or absorbed. We flag that gap so a buyer is not paying an EBITDA multiple for an SDE-level business.
What gets added back to reach SDE
On top of the standard EBITDA normalizations, SDE typically adds back:
- One owner’s salary, payroll taxes, and benefits
- Personal expenses run through the business
- One-time and non-recurring costs
Each add-back still has to be real and traceable. A figure that cannot be supported in the books does not survive diligence, regardless of which metric it lands in.
Why it matters for price
Small businesses are usually priced as a multiple of SDE. A defensible owner-salary normalization, at the deal’s multiple, can swing the purchase price by several times that amount, which is why the line between EBITDA and SDE is one of the most negotiated points in a small acquisition.
Frequently asked questions
Is SDE the same as EBITDA?
No. SDE adds one owner-operator’s full compensation back on top of EBITDA. EBITDA assumes a paid management team remains in place.
When should I use SDE instead of EBITDA?
Use SDE for owner-operated businesses a buyer will run hands-on, and EBITDA for businesses with a management team that stays after close.
Does SDE follow an accounting standard?
No. Like EBITDA, SDE is a deal metric, not a figure defined under the standards published by CPA Canada. It is an analysis, not an audited number.
Where to next
If you are valuing an owner-operated business, our transaction advisory team calculates SDE as part of a full Quality of Earnings analysis.
