What is SDE (seller's discretionary earnings) and when is it used?

SDE — Seller's Discretionary Earnings — measures the total financial benefit one full-time owner-operator takes from a business in a year. You start with pre-tax net profit and add back the owner's salary and benefits, interest, taxes, depreciation, amortization, and any one-time or non-operating expenses. The result is the full economic return a single owner-operator could expect, which is exactly what a hands-on buyer wants to know.

The defining difference from EBITDA is the owner's compensation. SDE adds back one owner's entire salary and perks because the buyer will step into that role and capture it themselves. EBITDA does not add back owner pay — it assumes a salaried manager stays in place. That single distinction is why SDE is the right metric for small, owner-run businesses and EBITDA is the right metric for larger companies that run on professional management.

SDE is used most often for "main street" and lower-end deals: businesses where one owner is central to operations and the likely buyer is an individual operator who will run it hands-on. As a rule of thumb, smaller owner-operated businesses change hands at roughly 2-4x SDE, with individual buyers typically paying 2-3x. Once a business is large enough to support a management team — and to attract search funds, private equity, or strategic buyers — valuation usually shifts to a 4-8x EBITDA basis.

Picking the wrong metric distorts the price: applying an EBITDA multiple to a tiny owner-operated shop understates it, while applying an SDE multiple to a managed mid-market company overstates it. Industry matters too — an HVAC business might sell at 2.5-4.5x SDE while a dental practice runs 2.5-5.0x. DealSeam helps owners frame the right metric and, where there's a fit, introduces qualified buyers at no cost to the seller.