When Main Street business owners ask what their company might be worth, the conversation almost always circles back to one number: SDE — Seller’s Discretionary Earnings.
SDE is not an accounting term you’ll find on a tax return. It’s a way to translate your financials into what a buyer really wants to know: how much cash flow would I have if I stepped into this business as an owner-operator?
The Simple Formula
Think of SDE as a reset button. You start with what the IRS says, then add back expenses that a new buyer wouldn’t necessarily carry.
Back-of-the-napkin SDE =
Net Profit (from tax return)
- Owner’s Salary/Draw
- Perks & Discretionary Expenses (personal car, travel, one-time costs)
- Interest, Taxes, Depreciation, Amortization
= SDE
An Example
Suppose your Schedule C shows:
- Net Profit: $50,000
- You paid yourself: $80,000
- You ran $20,000 of personal expenses (vehicle lease, phone plan) through the business
- Depreciation expense: $5,000
SDE = 50,000 + 80,000 + 20,000 + 5,000 = $155,000
That’s the earnings number a buyer would use when thinking about whether your business could support their lifestyle and cover debt payments.
Why It Matters
SDE is the most common yardstick for businesses under $1M in value. Industry surveys suggest smaller companies often sell for two to three times SDE — but that’s a ballpark, not a promise. A buyer will adjust depending on how transferable the earnings are and how confident they feel about the future.
What about the SBA?
While SDE is the most common way buyers and brokers talk about Main Street businesses, the SBA doesn’t base its lending decisions on a simple multiple of SDE. Instead, lenders look at whether the cash flow can support debt service — called the Debt Service Coverage Ratio (DSCR).
In practice, this often keeps valuations in the 2–3× SDE range because that’s what the cash flow can support with bank financing. But it’s not a formula the SBA “uses” — it’s the bank’s underwriting lens layered on top of what the market might otherwise pay.
Key Takeaway
Back-of-the-napkin math is a great way to get oriented. But it’s never a substitute for a full valuation. Every deal lives in its details: how clean the books are, whether earnings rely on one person, and how sustainable the cash flow looks to a buyer.
If you’re curious, run the math once — then speak with a licensed advisor who can put it in proper context. In the meantime, the best use of your energy is keeping sales strong and operations healthy. Buyers pay more for businesses that show steady growth and transferable systems. That way, when the time comes, the sale price reflects your years of hard work — not just the mechanics of a multiple.
Simone Dominique is an industry analyst focused on the human side of business transitions. Through her writing and research, she provides clarity on the M&A process for owners and buyers, exploring the intersection of market data and owner psychology.
