How do you calculate SDE?
SDE equals net profit plus one owner's full compensation plus documented add-backs. It answers one question: how much does a single working owner earn from this company in total?
| Line | What goes in it |
|---|---|
| Net profit | Pre-tax profit from the tax return or the reviewed financials |
| Plus one owner's full compensation | Salary, payroll taxes and benefits for the one owner who runs the business |
| Plus documented add-backs | Personal or one-time costs that a buyer will not inherit, each with a paper trail |
| Equals SDE | The figure an SDE multiple is applied to |
Take a company with $1,000,000 revenue and $250,000 SDE. The $250,000 is everything one owner-operator gets from the business in a year: the pay, the profit, and the personal costs the company absorbs. It is not revenue and it is not what remains after paying someone to run the company.
If a buyer rejects one add-back, SDE falls by exactly that amount, and the price falls by that amount times the multiple. One disputed line item moves the price by a multiple of itself. That is why you document each add-back before a buyer sees the numbers. The add-backs page covers which ones hold up.
If you want to run your own figures, the business valuation calculator for owners takes SDE as an input.
What is the difference between SDE and EBITDA?
EBITDA is SDE minus a market-rate salary for a replacement manager, so EBITDA is always the smaller number for an owner-operated business. SDE assumes the buyer will work in the business. EBITDA assumes someone is hired to run it and the owner is paid only as an investor.
This matters because each number carries its own multiple. Apply SDE multiples only to SDE and EBITDA multiples only to EBITDA. Mixing them, such as applying an EBITDA multiple to SDE, overstates the price and a buyer will catch it in the first conversation.
It also matters for financing. For a buyer using an SBA 7(a) loan, SOP 50 10 8.1 requires at least 1.25x debt service coverage for Initial Acquisitions and Owner Buyouts. The SBA measures it as EBITDA divided by combined post-transaction debt service, on the last fiscal year or a two-year average. Projections cannot be used to meet it.
So the lender looks past the SDE headline to EBITDA, and your buyer's ability to borrow depends on whether that historical EBITDA supports the price. A seller note on full standby is excluded from that debt service. Recasting your financials in both SDE and EBITDA terms before you go to market shows you what a lender will see.
Which expenses can I add back to SDE?
You can add back owner compensation and expenses that are personal, one-time, or non-recurring, provided you can document each one. A buyer's accountant will ask for the invoice, the bank statement and the tax return line behind every item.
- Accepted with paper: the owner's own pay and benefits, a family member's pay above the market rate for the work they actually do, personal vehicle or phone costs run through the company, and a documented one-time legal or moving cost.
- Challenged: a cost described as one-time that appears in several years, a family member who does real work but whom you will not replace, and an owner perk with no receipts.
- Not an add-back at all: capital items a buyer finds in diligence, such as a fleet that needs replacing or deferred maintenance. Those come off the price. They do not change SDE or EBITDA before the multiple is applied. Only recurring operating costs change earnings.
The add-backs a buyer rejects are not lost value in every case. Some become a price discussion on structure rather than on earnings. Read the full list on the add-backs page before you build your schedule.
Will a buyer verify my SDE?
Yes. A buyer verifies SDE against tax returns, bank statements and the general ledger, and on larger deals a lender can require an independent quality of earnings report.
Under SOP 50 10 8.1, an SBA lender must obtain an independent business valuation, requested by and prepared for the lender, when the business purchase price is above $350,000 or the buyer and seller are closely related. A valuation prepared for you as the seller cannot be used. At a business purchase price of $3,000,000 or more on an Initial Acquisition, the SBA also requires a quality of earnings report. It must include a cash proof, it cannot be prepared by or for the seller, and the lender uses the normalized earnings in its coverage calculation.
Your SDE is a claim until someone outside the company confirms it. Reconcile your add-backs to the tax return and bank deposits first. Then read the quality of earnings report page to see what that review examines line by line.
Frequently asked questions
Is SDE the same as net profit?+
No. Net profit is what remains after the owner's pay and every expense. SDE puts the owner's pay and documented personal or one-time costs back in, so it is the larger figure for an owner-operated business.
Can I use SDE if I am not the owner-operator?+
SDE assumes one full-time owner works in the business. If a manager already runs the company and you draw only profit, your earnings picture is closer to EBITDA, and a buyer will price it that way.
Does SDE include depreciation and interest?+
Yes, both are added back in the same way as owner pay, because a buyer's financing and equipment history will differ from yours. The depreciation you claimed can still matter to your tax bill at closing, which the depreciation recapture page explains.
Why does my broker or buyer ask for three years of SDE?+
Buyers and lenders look at the last fiscal year or a two-year average, and a longer record shows whether an add-back repeats. A cost that appears every year is hard to defend as one-time.
Does a higher SDE always mean a higher sale price?+
Only if the SDE survives verification. A buyer's accountant removes any add-back without documentation, and a lender tests historical EBITDA against the 1.25x requirement, so unsupported SDE can lower both price and the amount a buyer can borrow.