What is SDE (Seller's Discretionary Earnings)?
The Short Answer
SDE (Seller's Discretionary Earnings) explained simply
SDE stands for Seller's Discretionary Earnings. It's a way to measure how much money a business truly makes for its owner. Think of it as the total financial benefit an owner gets from their business. This includes the owner's salary, any perks they take (like a company car or health insurance), and the business's net profit, all before taxes and certain non-business expenses. It's a common way to value small businesses because it shows the real cash flow available to a single owner-operator.
Real-World Example
The Coffee Shop Scenario
Let's say a coffee shop has a net profit of $70,000. The owner also pays themselves a salary of $50,000 and uses the business to pay for their health insurance, which costs $10,000 a year. To calculate SDE, you would add these together:
- Net Profit: $70,000
- Owner's Salary: $50,000
- Owner's Health Insurance (perk): $10,000
Total SDE = $130,000
This $130,000 is the total financial benefit the owner receives from the business. A buyer would look at this number to understand how much they could potentially earn if they bought the coffee shop and ran it themselves.
Why this matters
SDE is important because it gives a clear picture of a business's true profitability for a single owner. It helps buyers understand how much money they could realistically make. For sellers, it helps set a fair price for their business. It strips away expenses that might not apply to a new owner, making the business's value easier to compare.
SDE is often used for businesses where the owner is also the primary operator. If you have a management team in place, EBITDA might be a better metric to use for valuation.
SDE is often used for businesses where the owner is also the primary operator. If you have a management team in place, EBITDA might be a better metric to use for valuation.
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