Definition
Seller's discretionary earnings (SDE) is the total financial benefit that one full-time working owner takes from a business in a year. It starts with net profit before tax, then adds back that owner's salary and benefits, interest, depreciation and amortisation, and any one-off or discretionary costs a new owner would not carry. It is the usual earnings measure for smaller, owner-run businesses, and many listings at that size quote it.
Net profit before tax is what a business earns after all its costs, including interest and depreciation, but before tax on its profits. It is the starting point for SDE and EBITDA.
Depreciation and amortisation spread the cost of long-lived assets over the years they are used. They reduce profit without any cash leaving the business in that year.
Worked example
Brightwater Cleaning Co. is a fictional US business. Its accounts show net profit before tax of $120,000. The owner draws a salary and benefits of $70,000, the business paid $10,000 of interest on a van loan and charged $15,000 of depreciation, and last year it spent $5,000 on a one-off office move, with invoices to prove it.
SDE = $120,000 + $70,000 + $10,000 + $15,000 + $5,000 = $220,000.
A second owner also works in the business full time. That owner's pay stays in costs, because only one working owner's pay is added back.
Why buyers care
SDE shows what the business might pay you before you fund the purchase, but it assumes you will do the owner's job yourself. If you plan to hire a manager instead, their salary comes out of SDE. That is the idea behind adjusted EBITDA, the measure larger deals are usually priced on.
Every add-back raises SDE, and a multiple applied to SDE turns each extra dollar into several dollars of asking price. Ask for evidence behind each adjustment before you rely on the figure. Loupe's valuation tool builds SDE in the same way and sets out each step under "Show the maths", so you can see which numbers carry the result.
Adjusted EBITDA is EBITDA after normalising adjustments, showing what a business would earn with a paid manager in the owner's seat. Larger small-business deals are usually priced on it.
Add-backs are costs added back to reported profit to show what a business would earn under a new owner. They raise SDE and adjusted EBITDA, so each one needs evidence.