Seller discretionary earnings, usually shortened to SDE, is the most important number in small business sales. It is the total financial benefit one owner gets from running the business, and it is the figure that valuations are built on. If you are buying or selling a small online business, understanding SDE is not optional. It is the language the whole deal is negotiated in.

SDE starts with the business's net profit, then adds back the costs that belong to the owner rather than the business. The most common add-backs are the owner's salary, personal expenses run through the business, one-off costs that will not repeat, and interest, tax, depreciation, and amortisation. The idea is to show what the business earns before the owner's personal choices distort the picture.

A simple example makes it clear. Suppose a small SaaS earns one hundred thousand dollars in revenue and shows twenty thousand in net profit after paying the owner a thirty thousand salary. The SDE is not twenty thousand. It is twenty thousand plus the thirty thousand salary, which is fifty thousand, because a new owner who runs the business themselves would keep that salary as part of their return. Add back a one-off legal fee of five thousand and the SDE becomes fifty-five thousand.

Buyers use SDE because it lets them compare businesses fairly. Two businesses with the same revenue can look very different on paper if one owner pays themselves a large salary and the other pays nothing. SDE strips out those choices and shows the underlying earning power. The sale price is then usually a multiple of SDE, often two to four times for small online businesses, depending on size, growth, and risk.

Sellers sometimes inflate SDE with add-backs that do not belong. Common tricks include adding back the owner's full salary when the business genuinely needs a paid operator, adding back marketing spend that is actually essential, or adding back a contractor who does core work. A good buyer asks for proof of every add-back and checks it against bank statements and tax returns.

To calculate SDE properly, start with the last twelve months of profit and loss, and ideally two to three years of history. List every add-back separately with a reason and a document to support it. Then subtract any costs the business will need under a new owner that it does not pay now, such as a salary for work the seller did for free. The honest number is the one you can defend line by line.

Not every cost a seller adds back will survive a buyer's review. The most commonly rejected add-backs are the owner's salary when the business genuinely needs a paid operator, marketing spend that is essential to keep revenue flat, and a contractor who does core work every week. A one-off expense is a fair add-back only if it truly will not repeat. A cost that appears every year, even under a different label, is a real cost of the business, and a careful buyer will treat it as one.

For larger deals, buyers often switch from SDE to EBITDA, which is earnings before interest, tax, depreciation, and amortisation, without adding back the owner's salary. The difference matters because a larger business usually needs a paid manager, so the owner's salary is a real cost. As a rule of thumb, SDE fits owner-operated businesses, while EBITDA fits businesses that can run without the owner. Knowing which number applies to your deal stops a lot of arguments about price.

Whether you are buying or selling, treat SDE as the start of the conversation, not the end. A high SDE with falling revenue, a single customer, or an owner who works sixty hours a week is worth less than a lower SDE from a stable, low-effort business. The multiple should reflect the quality of the earnings, not just the size of the number.