BuildExitReady, an advisory division of 7Mills
← Exit glossary

Seller's Discretionary Earnings (SDE)

Also known as SDE, Seller's Discretionary Cash Flow (SDCF), Owner's Discretionary Earnings, Discretionary Cash Flow

Seller's Discretionary Earnings (SDE) is a measure of the total yearly financial benefit that a single owner-operator draws from a business. It is worked out by starting from net profit and adding back one owner's salary and benefits, interest, tax, depreciation, amortisation, and any genuinely one-off or personal costs, so a prospective buyer can see the full earnings available to one working owner.

Why it matters at exit

For smaller owner-managed businesses, buyers often value the company as a multiple of SDE rather than EBITDA, because the owner’s own pay and perks are usually the largest single cost and a new owner may run the business themselves. A clean, well-documented SDE calculation lets you show the true earning power of the business and defend each add-back when a buyer’s accountant examines it. Weak records, vague personal expenses, or a figure that quietly depends on family members working unpaid will all reduce the SDE a buyer accepts, and therefore the price. Knowing your SDE early also tells you which costs are genuinely discretionary and which a buyer will treat as an unavoidable cost of trading.

Relates to the Mill Financial Clarity →

Frequently asked questions

What is the difference between SDE and EBITDA?
Both start from profit and add back interest, tax, depreciation and amortisation. The key difference is that SDE also adds back one owner's full salary and benefits, whereas EBITDA does not. SDE therefore suits smaller businesses that are valued on the basis of a single working owner, while EBITDA suits larger businesses that already employ a management team the buyer expects to keep paying.
Which owner costs can I legitimately add back to SDE?
You can usually add back the salary, pension and benefits of one owner, plus genuinely personal or one-off costs run through the business, such as a private vehicle, personal travel, or a non-recurring legal dispute. Each add-back needs clear documentation, because a buyer's accountant will remove anything that looks like a real, ongoing cost of running the business. If two owners both work full-time, typically only one owner's pay is added back; the second has to be replaced with a market-rate cost for that role.

See how your business scores against a buyer.

The free 7 Mills Score, 15 minutes, results in writing.

Take the Free Score →