What is SDE (Seller's Discretionary Earnings)?
Definition
SDE (Seller's Discretionary Earnings) is the primary valuation metric for small businesses. It represents the total financial benefit available to a single owner-operator, calculated by adding owner compensation and one-time expenses back to net profit.
The SDE Formula
SDE = Net Profit + Owner's Salary + Owner's Benefits + One-Time Expenses + Depreciation
What Gets Added Back to SDE?
- Owner's salary: The full W-2 or draw taken by the working owner
- Owner's benefits: Health insurance, car, phone, meals run through the business
- One-time expenses: Lawsuits, unusual repairs, non-recurring costs
- Depreciation: Non-cash expense that doesn't affect actual cash flow
- Personal expenses: Family cell phones, personal travel, etc.
SDE Multiples for Trade Businesses
Most Main Street trade businesses sell for 2-3x SDE. Factors that increase multiples:
- Recurring revenue: Service contracts, maintenance agreements
- Owner not required: Manager in place, technicians handle operations
- Multiple technicians: Not dependent on owner's labor
- Growth trends: Increasing revenue over 3+ years
SDE vs. EBITDA
SDE is used for owner-operated businesses where the buyer will work in the business. EBITDA is used for larger companies or when the buyer will be passive. For most trade businesses under $5M revenue, SDE is the appropriate metric.
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