Key Insight
SDE is the total economic benefit available to a single working owner — the number that tells a buyer what they are actually buying before they set a price.
What SDE Measures
SDE starts with reported net income and adds back:
- Owner's salary and benefits — compensation paid to the working owner, whether as W-2 wages, distributions, or S-corp pass-through
- Depreciation and amortization — non-cash charges that reduce taxable income but not cash flow
- Interest expense — debt is typically paid off at closing, so interest doesn't transfer
- Owner-specific personal expenses — vehicle, health insurance, phone, or other costs run through the business for the owner's personal benefit
- One-time or non-recurring expenses — legal fees from a specific dispute, one-time marketing spend, COVID relief repayments
The result is the true pre-tax cash flow available to a new owner who steps into the role.
Why SDE Is the Standard for Small Businesses
EBITDA is the standard for larger companies because it strips out owner compensation, making it easier to compare businesses with different ownership structures. But for businesses with less than ~$2M in annual earnings, the owner is the business — their compensation is inseparable from the economics. SDE normalizes for this by treating the owner's comp as part of the return.
Most SMB acquisitions are priced as a multiple of SDE: a business earning $300,000 in SDE sold at a 3x multiple sells for $900,000.
A HVAC company reports $80,000 net income. The owner pays himself a $150,000 salary, runs a $12,000 truck through the business, and had $8,000 in one-time legal fees from a supplier dispute. Adjusted SDE: $80,000 + $150,000 + $12,000 + $8,000 = $250,000. The business isn't a $80K earner — it's a $250K earner once you strip out the owner.
What SDE Doesn't Tell You
SDE is a snapshot of the past. It doesn't tell you whether earnings are sustainable, whether the owner is the reason customers stay, or whether a replacement owner could actually produce the same result. A high SDE with high owner-dependency is a very different asset than the same SDE in a system-driven business.
That's why quality-of-earnings analysis and operator assessment matter as much as the SDE calculation itself.
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