The investor’s field guide · S
Seller’s discretionary earnings
An estimate of the earnings available to one working owner before certain financing, tax and discretionary costs.
Explained by the editorial team
Seller’s discretionary earnings, often shortened to SDE, is common in US small-business listings. It usually adds one working owner’s compensation and selected expenses back to profit, alongside interest, tax, depreciation and amortisation. Definitions vary, so ask for the calculation rather than relying on the label.
A worked example
Suppose adjusted EBITDA is £90,000 after paying a working owner £50,000. Adding that compensation back produces SDE of £140,000, before any other justified adjustments. A buyer who needs a manager costing £60,000 cannot treat all that amount as passive income.
What to examine
Understand what work the owner actually does, how many hours it takes and which relationships depend on them. Check whether family members work below market rates. SDE describes an owner-operated situation; it is not directly comparable with EBITDA after a full management team has been paid. The cost of replacing the owner’s work belongs in the buyer’s own assessment.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.