You Next Job – CEO of Your Own Company? Better know SDE!
SDE stands for Seller’s Discretionary Earnings. It is the Total Owner Benefit a business produces and is generally used for evaluating businesses with gross annual sales that are under $1,000,000. For larger business, EBITDA is more frequently use. It is assumed with SDE that there is one (1) full time, working manager in the business. If, in realty, the owner is not working in the business, then the money spent on labor that could be saved with a full-time working owner should be added back to the Net Profit to get the SDE. In contrast, if multiple partners are working in the business, only partner would be considered. The amount a capable employ (or employees) would be paid to replace the additional partner(s) would be subtracted from the reported earnings. Other items, such as Interest and Depreciation, are also added back. See formula below:
SDE Formula
Profit on Income Taxes
+ Nonrecurring Expenses
– Nonrecurring Income
+ Non-operating Expenses
– Non-operating Income
+ Depreciation
+ Amortization
+ Interest Expense
+ One Owner’s Total Compensation
= SDE