Glossary

SDE — Seller's Discretionary Earnings

The total cash benefit to the owner of a small business. Used as the valuation basis for owner-operated businesses, typically those under ~$1M in earnings.

What it is

SDE = Net profit + Owner's total compensation (salary, bonus, payroll taxes, benefits) + Interest expense + Depreciation & amortization + Discretionary / non-recurring / personal expenses run through the business − Non-operating income.

The logic: a small-business owner pays themselves out of the business, and the "profit" line on the tax return already deducts that compensation. SDE reconstructs the total cash benefit available to a new owner who will replace the current one.

When to use it

• The current owner works full-time in the business.
• The buyer will replace the owner as the operator.
• The business's earnings are roughly below ~$1M per year.

Above ~$1M in earnings, businesses are typically valued on EBITDA instead — the owner's compensation becomes a real operating expense rather than a distribution of profit.

What SBA lenders do with SDE

SBA 7(a) lenders reconstruct SDE their own way — they typically back out add-backs they don't accept (ongoing capex, family-member payroll for real work, marketing that drives ongoing revenue) and apply a debt-service coverage ratio (DSCR) of 1.15–1.25 to determine how much debt the business cash flow can support. The lender's SDE number is typically lower than the listing's.

New York-specific notes

• NYS labor costs (workers' comp, statutory disability, Paid Family Leave, unemployment insurance) are real operating expenses — not add-backs. A target with employees will have these costs; model them in your post-close SDE.
• NYC taxes (Business Corporation Tax, Unincorporated Business Tax, Commercial Rent Tax where applicable) reduce SDE for NYC businesses — verify the seller's NYC tax filings as part of QoE.
• Sales tax collected from customers is a liability, not income — it should never appear in SDE.

Where to go next

• SDE vs EBITDA guide + interactive calculator
• Add-back definition
• Quality of Earnings definition
• DSCR definition