Seller's discretionary earnings, or SDE, is the total economic benefit a single owner-operator takes from a business in twelve months. The formula is simple: SDE equals net profit, plus the owner's salary, plus discretionary add-backs, plus one-time expenses. Add-backs are costs that benefit the owner personally rather than the business — a car the owner drives, travel that doubles as a holiday, or a family member on the payroll who does no work. Once you strip those out, SDE shows what the business actually throws off for the person running it.

SDE matters because it is the standard pricing yardstick for small, owner-run businesses. Larger companies are valued on EBITDA, but for a business under roughly $1 million in revenue, buyers price on SDE. In 2026, small online businesses typically sell for 2x to 4x SDE, and micro-SaaS businesses trade at a median of about 2.5x to 4.2x SDE. A business with $120,000 in SDE is therefore worth roughly $240,000 to $480,000, with the exact multiple depending on growth, churn, and how replaceable the owner is.

The add-backs are where deals are won and lost. A seller who adds back $40,000 of personal expenses is claiming the business earns $40,000 more than the tax return shows, and every dollar of add-back is worth two to four dollars of sale price at the multiple. That is why buyers check each add-back line by line. Legitimate add-backs are documented, recurring, and clearly personal. Vague categories like miscellaneous expenses or unexplained consulting fees get challenged, and a seller who cannot defend an add-back loses credibility on everything else.

SDE also exposes how dependent the business is on its owner. If the owner works 60 hours a week and takes no salary, the SDE overstates the profit a buyer will keep, because the buyer will either work those hours or pay someone to. Smart buyers calculate an adjusted SDE that subtracts a fair market salary for a replacement manager. A business that needs its owner full-time is worth less than one that runs on documented systems with a small team.

If you are selling, start tracking SDE properly at least a year before you list: separate personal spending from business spending, pay yourself a clear salary, and keep receipts for every add-back. If you are buying, rebuild the SDE yourself from bank statements and tax returns rather than accepting the seller's spreadsheet. The multiple is negotiable, but the SDE is the foundation — get it wrong and the whole price is wrong.

SDE and EBITDA answer the same question at different sizes. SDE is the standard for owner-operated businesses, because it captures everything the owner takes out, including salary and perks. EBITDA is the standard for larger companies with professional management, where the owner's salary is a real cost rather than a distribution. The crossover point is roughly $1 million to $2 million in revenue: below it, buyers price on SDE; above it, they price on EBITDA. The danger is mixing the two. A seller who quotes an EBITDA multiple for a business that runs entirely on the owner's unpaid labour is inflating the price, because a buyer who hires a manager will see that profit disappear. Conversely, a buyer who applies an SDE multiple to a business with a full management team is underpaying. Agree on the metric first, then argue about the multiple — never the other way around. The cleanest SDE calculation is the one a buyer can rebuild from the bank statements in an afternoon, with every add-back documented and every number traceable.