What Is SDE in a Business Valuation?

Seller's Discretionary Earnings can help frame owner-operated business economics when adjustments are transparent.

The idea behind SDE

SDE generally starts from business earnings and adds back certain owner compensation or discretionary items to approximate the economic benefit available to one owner-operator.

Why adjustments matter

An add-back should be explainable and non-recurring or owner-specific. Aggressive add-backs can make a business appear more profitable than a buyer will accept.

Use consistent periods

Trailing twelve months and multi-year trends can tell different stories. Label the period and method clearly.

SDE is not value

A buyer still needs a multiple or other valuation approach, plus adjustments for risk and growth.