Seller’s Discretionary Earnings (SDE) Explained for Florida Business Owners

If you’ve started researching what your business is worth, you’ve probably come across the term Seller’s Discretionary Earnings, commonly abbreviated as SDE. It’s one of the most important concepts in small business valuation, and understanding it can give you a significant advantage when it comes time to sell.

Let’s break it down in plain language.

What Is SDE?

Seller’s Discretionary Earnings is a measure of the total financial benefit an owner-operator receives from running a business each year. It’s calculated by taking your net profit and adding back certain expenses that reduce your taxable income but don’t represent real ongoing costs to a future buyer.

In other words, SDE is the answer to this question: “If I buy this business and run it myself full-time, how much money will it put in my pocket each year?”

How Is SDE Calculated?

Start with your net profit (after all expenses), then add back:

• Owner’s salary and benefits: What you pay yourself, including health insurance, retirement contributions, and any other owner-specific compensation
• Personal expenses run through the business: Vehicle expenses, phone bills, certain meals, travel, or other costs that are for your personal benefit and wouldn’t continue under new ownership
• Depreciation and amortization: These are non-cash accounting expenses that don’t represent actual money leaving the business
• Interest expense: Financing costs that are specific to your current debt structure and won’t carry over to the buyer
• One-time or non-recurring expenses: Costs that happened in a particular year but won’t repeat, major repairs, legal fees for a one-time issue, startup costs

The sum of all these additions gives you your SDE, and it’s almost always significantly higher than the net profit shown on your tax return.

A Simple Example

Let’s say you own an HVAC service company in Northeast Florida. Here’s a simplified example of how SDE might look:

• Net profit (as reported): $80,000
• Add: Owner salary, $90,000
• Add: Owner health insurance, $12,000
• Add: Personal vehicle expenses, $8,000
• Add: Depreciation, $15,000
• Add: One-time equipment repair, $7,000
• SDE: $212,000

That’s a dramatically different number, and it’s the number a buyer will use to evaluate what your business is worth.

How SDE Is Used in Valuation

Once you have your SDE, you apply a multiple based on your industry, business size, and quality factors. For most Main Street businesses in Florida, that multiple typically ranges from 2x to 4x.

Using the example above: a $212,000 SDE at a 3x multiple would suggest a business value around $636,000. That’s your starting point for pricing, before taking into account real estate, equipment, or other assets.

Why This Number Matters

SDE is the foundation of any business valuation for a small to mid-sized company. Getting it wrong, either too low or too high, leads to problems. Too low, and you leave money on the table. Too high, and buyers (or their lenders) can’t verify the number and the deal falls through.

That’s why it’s important to work with a professional who can help you accurately calculate your SDE and build a well-documented add-back schedule that buyers and lenders can verify.

Find Out Your SDE Estimate

Curious what your SDE might look like? Start with our free business valuation calculator, it’s designed to help Florida business owners get a realistic estimate of their business’s market value. Or reach out for a free consultation where we can walk through your actual numbers together.

Ryan C. Winter

Business Broker with Truforte Business Group · Licensed BK3362329

Ryan helps business owners across Florida sell their companies with preparation, process, and precision. Based in St. Augustine and serving the entire state, from Jacksonville to Miami, since 2018.

Talk With Ryan →

• Category: Business Valuation