The SDE formula
SDE = pre-tax net profit + one owner’s total compensation (salary, payroll taxes, benefits) + interest + depreciation and amortisation + discretionary and one-off expenses.
Only one owner’s compensation is added back. If two founders both work full-time in the business, the second salary normally stays in as an operating cost, because a buyer who steps into one role still has to pay someone to do the other.
When to use SDE and when to use EBITDA
SDE suits businesses where the buyer will be the operator: small e-commerce stores, content sites, agencies and local service businesses. Once a business has a management team that runs it without the owner, and particularly once it attracts private equity or strategic buyers, the market shifts to adjusted EBITDA.
Using the wrong base inflates or deflates value. Applying an EBITDA multiple to an SDE figure overstates value, because SDE is always the larger number for the same business.
How SDE multiples are applied
Small-business sale prices are commonly expressed as a multiple of SDE, often called the cash-flow multiple. BizBuySell’s quarterly Insight Report publishes median sale-price-to-cash-flow multiples for small US businesses, and these have typically sat between roughly 2x and 3x. Digital businesses with clean, transferable, recurring revenue can trade above that range.
The multiple within a range is driven by owner dependence, revenue concentration, growth trend, traffic and platform risk, and how well the numbers are documented.
Common SDE mistakes
Most disputes over SDE come from a small set of recurring errors:
- Adding back more than one owner’s full salary
- Treating recurring marketing or software costs as discretionary
- Adding back personal expenses without receipts or a clear audit trail
- Ignoring the cost of work the owner does for free that a buyer would have to pay for
Worked example
| Line | Amount (USD) |
|---|---|
| Pre-tax net profit | 310,000 |
| Owner salary, payroll taxes and benefits | +120,000 |
| Interest on business loan | +12,000 |
| Depreciation and amortisation | +18,000 |
| One-off website rebuild | +25,000 |
| Seller’s discretionary earnings | 485,000 |
Frequently asked questions
- Is SDE the same as owner’s cash flow?
- Broadly, yes. SDE, owner’s cash flow and discretionary earnings are used interchangeably in small-business sales. Always confirm which items were added back before comparing two figures.
- Can SDE be higher than revenue minus direct costs?
- No. SDE is built from net profit plus specific add-backs, so it cannot exceed gross profit. A figure that does is a sign of double counting.
- Do private equity buyers use SDE?
- Rarely. Institutional buyers install or retain management, so they value on adjusted EBITDA, which keeps a market-rate management cost in the numbers.
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