If you have looked into selling a trade or service business, you have probably seen the term SDE and heard people talk about multiples. Here is what those terms mean, how to calculate SDE, and what makes a buyer pay a higher or lower multiple.
What is SDE?
Seller's discretionary earnings is the total financial benefit the business provides to one full-time owner-operator. It starts with pre-tax net profit and adds back:
- The owner's salary, payroll taxes and benefits (for one owner).
- Interest expense.
- Depreciation and amortization.
- Personal expenses run through the business, such as a personal vehicle or family cell phones.
- One-time, non-recurring expenses, such as a lawsuit settlement or a one-off repair.
A simple example
Imagine a company with net profit of $150,000. The owner pays themselves $100,000, has $20,000 of depreciation, $5,000 of interest and $10,000 of personal vehicle costs on the books. SDE is $150,000 + $100,000 + $20,000 + $5,000 + $10,000 = $285,000. (These numbers are for illustration only.)
Add-backs must be real
Every add-back needs support: receipts, statements, or a clear explanation. Buyers and lenders will test them. Common problems include adding back expenses the business actually needs, like a truck a tech drives, or claiming unreported cash income. Overreaching on add-backs usually costs credibility and time.
SDE vs. EBITDA
SDE fits businesses where one owner runs the show. As a business grows and has managers in place, buyers typically switch to EBITDA, which subtracts a market salary for whoever would run the company. If your company already has a general manager, expect buyers to look at EBITDA.
What is a multiple?
The multiple is what a buyer will pay for each dollar of earnings. Industry reports and brokers publish typical ranges, but they move with size, industry, interest rates and buyer demand, and they hide a lot of variation. We don't quote a standard multiple because the right one depends on your details.
What moves the multiple
- Transferability: can the business keep earning without you?
- Recurring revenue: service agreements and contracts increase predictability.
- Concentration: fewer dependencies on single customers or referral sources.
- Trend: stable or growing earnings beat declining ones.
- Size: larger earnings generally attract more buyers.
- Licensing: a clear plan for who qualifies the business after closing.
Deal terms matter too
A headline price based on a high multiple can be worth less than a lower price with more cash at closing. Look at the whole package, including seller financing, earn-outs and what happens to your real estate.
This guide is general information, not legal, tax or financial advice. Consult your own attorney and CPA.