There’s a quiet moment many small business owners face—when someone leans in during a casual conversation, or a broker emails you back after a valuation request, and the term SDE floats into the room. You pause. You nod like you understand. But deep down? You’re thinking, “Wait, what exactly is that again?”
And you wouldn’t be alone. SDE—Seller’s Discretionary Earnings—is one of those terms that feels more complicated than it actually is. So today, we’re going to unpack it. Gently. With examples. With real-world flavor. Not some stuffy textbook definition or confusing corporate lingo.
Not Just Profit: The Story Behind the Number
Let’s start with something honest: running a business isn’t just about neat profit and loss statements. It’s messy. Owners take salaries. They write off their cell phones. Maybe the occasional lunch with a “client” that looks suspiciously like a catch-up with an old friend. And when it comes time to sell, all of that gets rolled into the question: What is this business really earning?
That’s where the idea of what does SDE stand for in business comes into play. It stands for Seller’s Discretionary Earnings—a fancy term that boils down to one core idea: what could a new owner expect to earn if they took over your business and operated it as a single owner-operator?
It’s not just net income. It’s adjusted income. Real income. The income after adding back things like your personal car lease, one-time consulting fees, your salary, and other owner-specific perks. It’s the clearest window into the true earning power of a small business.
SDE vs. EBITDA: Not Just Alphabet Soup
You might’ve heard of EBITDA. It’s popular in the corporate world—especially in bigger M&A deals. But for small businesses? SDE is the go-to metric.
The difference? EBITDA strips out interest, taxes, depreciation, and amortization to find a “clean” operating income. It’s great if you’re dealing with multiple owners or a hands-off executive team.
But most small businesses? They’re personal. They’re run by one person—or maybe a tight-knit family team. That’s where SDE business meaning becomes more useful. It reflects not just profit, but ownership realities. It’s designed to answer, “If I bought this business, what could I reasonably expect to make from it?”
How SDE Is Calculated (Without a Headache)
Let’s take a quick example. Say you run a boutique bakery. Your books say:
- Net Profit: $65,000
- Owner’s Salary: $45,000
- Personal Car Lease (used for deliveries): $6,000
- Family health insurance paid through the biz: $9,000
- One-time oven repair: $3,000
Your SDE? That’s $65K + $45K + $6K + $9K + $3K = $128,000
Why? Because those “add-backs” represent earnings a buyer could potentially pocket if they weren’t using the business to pay for those same owner-specific items.
It’s not trickery. It’s clarity.
Why Buyers and Brokers Rely on SDE
Here’s the thing. Buyers don’t want guesswork. They want to know what’s in it for them.
What does SDE mean in business terms, then? It means context. It means transparency. It’s how you speak a buyer’s language.
And if you’re selling? It becomes your negotiating power. A healthy, well-documented SDE helps justify your asking price. Without it? You’re left saying, “Trust me, it’s worth more than the books show.” And that’s a hard sell.
On the flip side, if you’re buying? SDE helps you quickly compare different opportunities. You’re not just looking at profit—you’re looking at potential.
Common Mistakes Business Owners Make With SDE
Let’s be real. Not every owner gets SDE right.
Some overinflate it. They count expenses that aren’t truly discretionary. Or they forget that if the business can’t run without a general manager, that GM’s salary has to stay in the financials. Otherwise, the SDE is misleading.
Others underreport it—missing opportunities to show a stronger business value.
The best move? Work with an accountant or a business broker who understands SDE inside and out. They’ll help you clean up your books, justify your add-backs, and package your business in a way that makes sense to serious buyers.
SDE and Legacy: Telling the Whole Story
Let’s zoom out for a moment.
When you’re selling your business—or even evaluating it—you’re not just passing on a balance sheet. You’re passing on a story. Years of effort. Growth. Struggles. Triumphs.
SDE isn’t just a number. It’s the bridge between what your business has been and what it could be for someone new.
It’s about more than just convincing someone to buy. It’s about helping them believe in your business as a worthwhile, profitable next chapter in their life.
Is SDE Useful If You’re Not Selling?
Absolutely. Even if you’re not planning to sell any time soon, understanding SDE gives you a clearer picture of your own operations.
It’s a way to step back and ask, “How healthy is my business, really?”
Could you increase discretionary earnings by streamlining expenses? Would cleaning up your financials now make future exits easier?
It’s not just about preparing for sale. It’s about running a tighter, more intentional business today.
One Last Word on SDE: Be Honest
We’ve all seen the Craigslist-style listings where someone says, “Business makes $250K!” and then you find out they’re adding back their cousin’s unreported salary and three years of unpaid rent.
Don’t be that person.
The best deals happen when both sides walk in with trust and transparency. SDE works best when it’s built honestly—backed by receipts, books, and clear documentation. The cleaner and clearer it is, the more confidence a buyer will have. And that means a smoother sale. A better price. A faster close.
Final Thought: A Number That’s Bigger Than It Looks
In the end, SDE is just a number. But what it represents? That’s the magic.
It tells the story of how your business operates. How you’ve chosen to live and work. What your priorities have been. And what a new owner could step into, should they decide to pick up the reins.
