Calculate Seller's Discretionary Earnings (SDE)

SDE is the total financial benefit a business delivers to a single full-time owner-operator in a year. It's the standard earnings measure for pricing Main Street businesses, and it's what buyers, brokers, and SBA lenders apply an industry multiple to when they value a business.

The idea is simple: rebuild the income statement as if the buyer were about to step in and run the company. Start with pre-tax net profit, then add back the pay and perks the current owner takes out, plus non-cash and one-time items a new owner won't carry. The result is the real cash a hands-on owner could expect the business to generate.

You start with your pre-tax net profit - the bottom-line profit before income taxes. Because it's already pre-tax, there's nothing to add back for income tax, which keeps the math clean. You'll find it on the same line of your federal return, depending on how your business is structured:

Buyers and lenders typically average the last two to three years, so use a representative figure rather than a single unusually strong (or weak) year.

Because it prevents the single most common SDE mistake: double-counting the owner's pay. Whether your compensation gets added back depends entirely on whether it was already deducted before your net profit line.

• Owner's draw: A draw isn't a deductible business expense, so it was never subtracted from profit. It's already in your net profit, so adding it back would be double-dipping, and inflates your SDE. (This is the typical case for sole props and single-member LLCs.)
• W-2 salary or guaranteed payment: This was deducted as a business expense before net profit, so it gets added back. (This is the typical case for S-corps and partnerships.)
• Both: Some owners take a salary and distributions. Only the deducted salary portion is added back; the distributions are already in profit.

Answer honestly and the calculator shows or hides the salary field automatically, so your owner comp is counted exactly once.

SDE measures the benefit to one full-time owner-operator, which is the person stepping into the business. If two owners work in the business, only one salary can be fully added back, because the buyer will still need to pay someone to do the second owner's job.

That second role is valued at a market replacement wage, and only the amount above that market rate (if any) is added back. The same logic applies to a family member on payroll: if the spouse genuinely runs the books 40 hours a week, the buyer needs to replace that labor, so you add back only the portion above what a replacement would cost, not the full paycheck.

A good rule of thumb: an expense is a legitimate add-back if a new owner won't have to keep paying it to run the business. The calculator groups them into the categories buyers and lenders recognize:

• Owner compensation & benefits: One owner's salary and employer payroll taxes on it, plus health/dental/vision/life insurance and retirement contributions the business paid.
• Depreciation & amortization: Non-cash accounting charges - standard and rarely disputed.
• Interest: On business debt, since the buyer will set up their own financing.
• Personal expenses: Personal-use vehicle, owner travel and entertainment, personal subscriptions and phone, owner-directed charitable gifts.
• One-time / non-recurring costs: A lawsuit, storm damage, or a one-off system build.

The golden rule is documentation. Every add-back should be defensible with receipts and visible on your tax returns and financials, or a buyer's lender will strip it right back out.

This is where sellers get into trouble. Padding SDE with items that don't belong only gets flagged and reversed during due diligence, and it affects your credibility with the buyer. The usual offenders:

• Payroll, sales, or property tax. These are real operating costs a buyer keeps paying. Only entity-level income tax (essentially C-corp tax) is ever added back, and starting from pre-tax profit means there's nothing to add.
• Loan principal payments. Interest appears on the P&L and is added back; principal never hits the P&L, so there's nothing to add.
• A second owner's full salary. Only one owner-operator's pay is added back (see question 4).
• "One-time" costs that recur. If it shows up in two of the last three years, it's an operating cost, not a one-off.

That's why this calculator deliberately has no generic "taxes" field and no principal field - two common inflation traps are designed out.

Then you need a rent-to-market adjustment, and it can go in either direction:

• If you charged the business above-market rent (or paid yourself generously as the landlord), enter a positive number to add the excess back, since a new owner would pay only market rate.
• If you charged below-market rent or let the business operate rent-free, enter a negative number. The buyer will have to pay full market rent going forward, so SDE should be reduced to reflect that real cost.

Getting the rent direction right matters: ignoring a below-market arrangement is one of the quickest ways to overstate SDE and have a lender push back.

Not always. Many owners intentionally minimize reported profit to reduce taxes, running compensation and personal expenses through the business, and this is exactly why SDE exists. A company can show a slim or even negative net profit on paper that recasts to a healthy positive SDE once the legitimate add-backs go back in.

The calculator lets you enter a negative net profit for this reason. If your add-backs lift it into positive territory, that's the metric working as intended. Just be ready to document every add-back, because these are often a source of contention. If SDE is still negative after the add-backs, that may reflect a genuine down year, and it's worth reviewing the figures with a CPA before you use them for pricing.

The dividing line is owner compensation. SDE adds back one owner's full pay; adjusted EBITDA only adds back the amount above a market-rate manager's salary, because it assumes a paid manager is running the business.

That makes SDE the right measure for owner-operated businesses (typically under about $5 million in revenue) where the buyer will personally step into the owner's role. EBITDA takes over for larger businesses that already have a management layer, usually bought by private equity or a competitor who'll keep a manager in place. All else equal, SDE is a higher number than EBITDA, but the multiples applied to SDE are correspondingly lower.

SDE is the starting point for pricing. Most small businesses are valued as SDE × an industry multiple, with Main Street businesses typically trading between 2× and 4× SDE depending on their industry and risk profile.

To turn your SDE into an estimated price, run it through BizBuySell's Business Valuation Calculator, which applies real industry multiples and adjusts for the qualities buyers reward. If financing is part of the picture, use the Debt Service Coverage Calculator to see whether the cash flow can actually cover a loan after a replacement salary.

No. This tool provides educational estimates only and follows the standard pre-tax SDE method. It is not a formal appraisal, not a guarantee of value, and not tax, legal, or financial advice. Add-backs can be disputed by buyers and lenders, who calculate from verified tax returns rather than estimates. Before you list, make an offer, or arrange financing, have a qualified CPA or business broker review and confirm your figures.