SDE explained: owner earnings and add-backs

Seller's discretionary earnings (SDE), also called owner earnings or cash flow, is the number most small businesses are priced on. A buyer multiplies it by a market multiple for the trade. Get SDE wrong and the valuation is wrong, however good the multiple is.

What SDE means

SDE is the total yearly financial benefit to one full-time owner-operator, before income tax and before paying for financing. It answers a buyer's question: if I own this and run it myself, what do I take home before paying my loan?

The formula

SDE = net profit before income tax + one owner's salary, payroll taxes and benefits + depreciation and amortization + interest + personal or discretionary expenses run through the business + one-time, non-recurring expenses − one-time, non-recurring income.

Worked example

Hypothetical. A service business with $900,000 of revenue:

Net profit on the tax return	$62,000
+ Owner salary (W-2) and owner payroll taxes	$78,000
+ Owner health insurance paid by the business	$14,000
+ Depreciation	$21,000
+ Interest on equipment loans	$6,000
+ Personal vehicle and phone run through the business	$9,000
+ One-time: lawsuit settlement in 2025	$12,000
= SDE	$202,000

At a 2.5× multiple, that's about $505,000. Leave out the add-backs and use net profit alone, and the same business looks worth $155,000.

Add-backs buyers usually accept

One owner's salary or draws, plus payroll taxes and benefits (health insurance, retirement contributions).
Depreciation and amortization (non-cash).
Interest on business debt (the buyer finances the purchase their own way).
Personal expenses paid by the business: a personal vehicle, phone, travel or meals that aren't needed to run it.
Truly one-time costs: a lawsuit, a move, a software migration, storm damage.
Above-market rent paid to an owner-related landlord, adjusted to market rent.

Add-backs buyers usually reject

Unreported cash income.
“One-time” costs that happen every year (repairs, marketing pushes, equipment replacement).
A second working owner's or family member's salary, when that work would need to be replaced.
Expenses with no receipts or a clear business-versus-personal split.
Wages a buyer would need to pay to replace unpaid family help.

Documents buyers ask for

Three years of business tax returns, year-to-date and monthly P&Ls, an add-back schedule with receipts or ledger references, and bank statements. SBA lenders tie SDE to tax returns, so add-backs that don't reconcile are usually removed.

Questions

Is SDE the same as EBITDA?

No. EBITDA subtracts a market-rate salary for the person running the business; SDE adds the one owner's full pay back. For the same business, SDE is higher. Main-street businesses usually sell on SDE; larger ones (roughly $1M+ of earnings) on EBITDA.

Can I add back cash income that isn't on my tax return?

Buyers and SBA lenders almost never accept it. If income isn't reported, a buyer can't verify it and a lender won't finance it.

What if two owners work in the business?

Only one owner's pay is added back. The second owner's salary stays as a cost, at a market rate, because a buyer will need to hire someone to do that job.

Which year's SDE should I use?

The most recent full year, if it's representative. Buyers also look at a three-year trend; falling earnings lower the multiple, and a single strong year is often averaged down.

Add-backs by trade

Each trade guide lists the add-backs typical for that business and the published multiple to apply. See also how we value businesses.

Value your business free

General information, not tax or accounting advice. MainStreetKeys is not a business broker.