Glossary
SDE — Seller's Discretionary Earnings
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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) floor, which SBA sets at 1.25 on a first acquisition, 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.
Frequently asked questions
What is the difference between SDE and net profit?
SDE adds back what a single owner-operator effectively receives or controls: their own compensation, discretionary personal expenses run through the business, interest, tax, depreciation and genuine one-offs. Net profit is what is left after all of it. SDE is the larger number and the one small businesses are priced on.
Will an SBA lender accept my SDE calculation?
They will run their own. Lenders reconstruct SDE their own way and back out add-backs they do not accept, so expect their figure to be lower than the listing's. The gap between the two is the most useful diligence list you will get.
Should I subtract a salary for myself?
For deciding what you can afford, yes. SDE includes the owner's full compensation, so it is only entirely available for debt service if you intend to take nothing. Subtract what you actually need to live on, or the full market cost of a manager if you intend to hire one.
Educational only — not legal, tax, lending, or investment advice. Confirm specific rules, rates, and forms with the relevant New York State agency, attorney, CPA, lender, or insurer before acting. See the editorial policy and methodology for how sourcing and review work.