SDE (Seller's Discretionary Earnings)
Definition
A measure of what a small business earns for one owner-operator: profit before taxes, interest, depreciation, plus the owner's salary and personal or one-time expenses. It is the standard basis for valuing smaller e-commerce businesses.
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Formula
SDE = Net Income + Owner Compensation + Interest + Depreciation & Amortization + Add-BacksSmaller businesses are usually valued as a multiple of SDE, while larger ones use EBITDA. Every documented, legitimate add-back raises SDE and the price.
Buyers will verify all of it against tax returns and bank statements. Watch for: personal expenses run through the business without clear records, which helps neither taxes nor valuation once a buyer looks closely.
Example
Net income of $150,000, owner salary of $90,000, $10,000 of interest, $15,000 of depreciation and $20,000 of one-time costs gives SDE of $285,000.