Seller's Discretionary Earnings
What is Seller's Discretionary Earnings?
Seller's discretionary earnings (SDE) is the profit figure a small owner-operated business is actually valued on. It starts from net profit and adds back the owner's salary, the owner's benefits and personal expenses run through the business, interest, taxes, depreciation, and any one-time or non-recurring costs — so a buyer sees the full financial benefit a single working owner takes from the business. Service and route businesses typically change hands at a multiple of SDE, which makes SDE, not headline revenue, the number that sets the sale price.
When an owner-operated service business sells, the buyer is not really buying last year’s revenue — they are buying the income one working owner can pull from it. Seller’s discretionary earnings is the number that captures that. You begin with net profit, then add back the things that exist only because of how the current owner runs it: their own pay, personal expenses charged to the business, interest, taxes, depreciation, and any genuinely one-time costs. What remains is the full economic benefit the business throws off to a hands-on owner.
That add-back work matters because most small operators deliberately minimize taxable profit, so net profit alone makes a healthy business look marginal. SDE normalizes for that and lets a buyer compare two books on the same footing.
Sale prices are then quoted as a multiple of SDE, and the multiple is where the rest of the story lives: recurring contracts, a dense route, low customer churn, and clean books all push it up; owner-dependence and scattered one-off work push it down. The multiple varies enough by trade and market that it is worth a broker’s read rather than a rule of thumb. Tighten the inputs first with the business profit & revenue goal planner and your route’s valuation calculator.