OWNER EARNINGS, EXPLAINED
Calculate seller’s discretionary earnings.
Most owners know their tax-return profit. SDE asks a different question: how much financial benefit does the business produce for one working owner after defensible adjustments?
Calculate my SDEFREE SDE CALCULATOR
Turn your tax-return profit into owner cash flow.
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NORMALIZE, DON’T INFLATE
Every add-back needs a reason.
SDE is useful when it translates reported profit into the economics a buyer would inherit. It becomes misleading when ordinary future costs are relabeled as optional.
Start from one period
Use profit and expenses from the same trailing twelve months or fiscal year. Mixing periods creates a cash-flow number no buyer can reproduce.
Keep the evidence
Tax returns, general-ledger detail, invoices, payroll records, and a short explanation make each proposed adjustment easier to test.
Preserve future costs
Do not add back labor, rent, software, marketing, maintenance, or other expenses a buyer still needs to operate at the assumed revenue level.
COMMON QUESTIONS
SDE without the mystery.
What is seller’s discretionary earnings?
Seller’s discretionary earnings, or SDE, is a normalized earnings measure for an owner-operated business. It starts with business profit and adds back one working owner’s compensation plus documented expenses that would not continue for a buyer.
What expenses can be added back to SDE?
Common candidates include one working owner’s compensation already recorded as an expense, interest, depreciation, amortization, supported personal benefits, and documented one-time expenses. Owner draws are distributions rather than expenses and are not added back. An amount is not an add-back merely because an owner prefers to exclude it; it should be recorded and unlikely to continue.
How is SDE different from EBITDA?
SDE usually adds one working owner’s compensation and supported discretionary benefits to an earnings base. EBITDA does not normally add back market compensation required to operate the business, so SDE and EBITDA should not be treated as interchangeable.
How do multiple working owners affect SDE?
SDE generally reflects the benefit available to one working owner. If additional owners perform necessary jobs and their labor is not already included in payroll or operating expenses, market replacement compensation for those roles should be deducted rather than presented as free cash flow.