Seller discretionary earnings, usually shortened to SDE, is the profit left after adding back the owner's salary and genuine one-off costs, while net profit is what remains after every expense recorded on the books. Knowing which figure a seller is quoting changes the price you should pay, sometimes by tens of thousands of dollars on a small deal, because the two numbers describe the same business from different points of view. SDE tries to answer the question of what a new owner-operator could earn, while net profit answers the stricter question of what the business earned as it was actually run, and confusing the two is one of the most common reasons buyers overpay for online businesses.

SDE exists for a good reason in small, owner-operated businesses, where personal and business costs are often mixed together. A founder's salary, a family car run through the company, a home office allowance, or a one-time legal bill may not transfer to you as the new owner, so adding those costs back gives a clearer picture of the operating profit available to someone who replaces the founder. For a business where you will step into the owner's role and do the same work yourself, SDE is often the more useful starting point, provided every add-back is genuine, documented, and genuinely non-recurring or personal in nature.

Net profit is the stricter and more conservative figure, and it is the one that lenders, accountants, and larger buyers usually prefer. It is what the tax return and the bank statements show after all recorded expenses, and it leaves far less room for creative add-backs that flatter the business. If you plan to hire someone to run the business, or if the business already has a team whose salaries must continue, net profit is closer to reality, because those salaries are real costs that will not disappear just because ownership changed. Comparing a multiple quoted on SDE with a multiple quoted on net profit as if they were interchangeable is a category error that inflates value.

The danger in any SDE figure lies in the add-backs themselves, and this is where careful buyers earn their money. A seller who adds back a contractor who actually does core work, a marketing cost that must continue to bring in customers, or software subscriptions the business cannot run without is inflating SDE with costs that will return the moment you take over. Challenge every single add-back, ask for receipts, contracts, and a written explanation of why each cost will not recur, and be especially wary of vague categories such as personal expenses or owner perks with no breakdown behind them.

Rebuild both numbers yourself from twelve to twenty-four months of bank statements, payment processor records, and tax returns, rather than accepting either figure on trust. Lay the seller's profit and loss statement beside the bank deposits, trace the largest add-backs to their source documents, and note any gap between reported revenue and money actually received. If SDE and net profit are far apart, ask the seller to walk you through each difference line by line, and watch for discomfort or vagueness around the largest items, since that reaction often tells you as much as the documents do.

Your offer should rest on the rebuilt figure, documented in writing and reflected in the purchase agreement. Use SDE for small owner-operated deals where you will genuinely replace the founder's labour, and net profit for larger or team-run businesses where salaries and overheads transfer with the sale. A clean, written reconciliation from net profit to SDE protects you in negotiation, gives a lender or partner confidence that the valuation is grounded in evidence, and removes the most common source of regret after closing, which is discovering that the profit you paid for was never really there.