Seller's Discretionary Earnings (SDE)

Definition

Seller’s discretionary earnings (SDE) take EBITDA and add back the owner’s total compensation along with any personal expenses that flow through the business. The goal is to measure the full benefit available to a single owner who runs the business themselves.

In French-language Quebec documentation, you’ll see BDV (bénéfice discrétionnaire du vendeur) used for the same concept.

In practice, SDE starts from net income, then adds back interest, taxes, depreciation and amortization, the owner’s salary, their personal benefits, their company vehicle, and any other expense a new owner wouldn’t incur. The result represents what the buyer will have available to pay themselves, service their acquisition debt, and generate a profit.

Why SDE matters in a business sale

SDE is the reference measure for small businesses — typically those generating less than $2 million in annual revenue, where the owner is also the lead manager, key salesperson, and often the sole decision-maker.

In that context, EBITDA understates real profitability because it doesn’t account for the fact that the owner’s salary is partly disguised profit.

For larger SMEs, EBITDA becomes the preferred measure. The reason is simple: in a business that already employs a salaried general manager, the owner’s salary isn’t a discretionary expense — it would need to be replaced either way. EBITDA then better reflects the real profitability of operations.

This distinction has a direct impact on your sale price. SDE generates lower valuation multiples than EBITDA — generally 2x to 4x for SDE, compared with 4x to 7x for EBITDA.

That isn’t because the business is worth less. It’s because the SDE multiple already factors in the cost of replacing the owner. If your business sits between the two measures, choosing the right one can represent a meaningful difference in price.

What every seller should know

• If your revenue is below $2 million and you’re actively involved in operations, buyers will likely value your business on SDE, not EBITDA.
• SDE multiples are lower (2x to 4x) than EBITDA multiples (4x to 7x), but both methods should lead to a comparable business value — the difference is in the calculation, not the end result.
• Clearly document every personal expense run through the business — each dollar identified increases your SDE, and therefore your potential sale price.
• If your business is growing and approaching the threshold where EBITDA becomes appropriate, it can be strategic to hire a manager before the sale to show that the business runs without you — which justifies moving to an EBITDA multiple, generally more favourable.