Precise SBA Get started
Buy a business Buy a building Expand Learn Tools About

Glossary

What is Seller's Discretionary Earnings (SDE)?

Also called: SDE, seller's discretionary cash flow, owner's cash flow

In one sentence: A small-business earnings measure: pre-tax profit plus one owner's compensation and benefits, interest, depreciation, amortization and one-time or discretionary expenses.

Last updated · Precise SBA editorial

In plain English

SDE answers a buyer’s question: if I owned this business and ran it myself, how much would it produce before I paid myself and before financing? It starts with pre-tax profit, then adds back one owner’s salary and benefits, interest, depreciation and amortization, and expenses that are discretionary or one-time.

It’s the standard measure in listings for small, owner-operated businesses, and the basis of most valuation multiples quoted for them.

How lenders translate it

Lenders don’t stop at SDE. Under the current SBA rules for a change of ownership, coverage starts from EBITDA and adjusts for items such as owner compensation, unfunded capital spending and seller discretionary expenses, and each adjustment must be justified. In practice, the lender’s number is SDE minus a market salary for you, minus capital spending, with only documented add-backs.

Hypothetical example

Pre-tax profit $180,000. Add back the owner’s salary ($110,000), the owner’s health insurance ($18,000), depreciation ($30,000), interest ($12,000) and a one-time legal bill ($15,000). SDE: $365,000.

The lender deducts a $100,000 market salary and $20,000 of equipment replacement, and declines the legal bill because a similar one appeared two years earlier. Lender cash flow: $230,000, well below the SDE figure in the listing.

Common mix-ups

  • SDE is not what you’ll take home. Debt payments and taxes come out of it.
  • Two owners, one add-back. Only one owner’s pay is normally added back.

What to do with it

Use SDE to compare listings, and lender cash flow to decide what you can afford. See how lenders calculate cash flow and add-backs.

Common questions

Is SDE the same as cash flow for a lender?

No. SDE is before any pay for the owner. A lender deducts a realistic salary for whoever runs the business, and usually capital spending the business must fund, before testing coverage. Lender cash flow is lower than SDE.

How is SDE different from EBITDA?

EBITDA is after a market salary for management; SDE adds that salary back for one owner. For a small business where the owner is the manager, SDE is the larger figure.

Can SDE include more than one owner's salary?

By convention, SDE adds back one full-time owner's compensation. If two owners work in the business, the second owner's role still has to be paid for by someone, so adding back both overstates the earnings.

Related terms

Valuation MultipleA business's price or value divided by a measure of its earnings (commonly SDE or EBITDA), used as shorthand to compare businesses and test whether a price is reasonable.Add-BacksExpenses added back to reported earnings because they are non-cash, will not continue after a deal, or are personal to the current owner.Debt Service Coverage Ratio (DSCR)Cash available to pay debts, divided by the debt payments due in the same period; above 1.0x there is a cushion, and lenders want margin above their own minimum.

Go deeper

How Lenders Calculate Cash Flow and DSCR, Step by StepFrom net income to a coverage ratio in five steps, with every number shown. This is the math behind most acquisition and expansion loan decisions.How a Business Is Valued for an SBA Loan (and What If the Price Is Higher)In an SBA-financed purchase, the price you agree with the seller is only half the story. The lender's independent valuation decides how much of that price can be financed, and the rest has to come from you.

Want to see how this applies to your deal?

Tell us what you are trying to do. We don't pull your credit to start, and there is no pressure.

Tell us your plan

General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. Rules and lender policies change. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid). Back to the glossary.