TLDR
- SDE, seller’s discretionary earnings, is what a business makes for one owner-operator: its profit, plus the owner’s own pay and perks, plus one-off and non-cash costs added back.
- Small owner-run businesses are commonly priced at roughly two to four times SDE. Where a business lands in that range depends mostly on how much it needs its owner, how steady its profit is and how spread out its customers are.
- The price isn’t what you keep. After earn-out risk, fees and tax, many owners keep 60% to 80% of it.
- In one worked example, $250,000 of SDE priced at 2 times and 4 times put the owner 18 and 11 years from their FI number.
An SDE multiple tells you what a buyer might pay. It doesn’t tell you what reaches your bank account, or what that does to the date your money can pay your life. This page does all three, with one worked example.
What is SDE?
Seller’s discretionary earnings is the total yearly benefit one full-time owner gets from a business. Start with net profit, then add back the owner’s salary, personal costs run through the business, one-off expenses that won’t repeat, and non-cash or financing costs such as depreciation and interest. Buyers of small businesses price on it because they’ll step into the owner’s seat.
| Line (example) | Amount |
|---|---|
| Net profit on the accounts | $120,000 |
| Owner’s own salary | $90,000 |
| Owner’s car run through the business | $10,000 |
| One-off legal bill | $8,000 |
| Depreciation | $15,000 |
| Loan interest | $7,000 |
| SDE | $250,000 |
Every add-back has to be provable. A buyer’s accountant will go through them line by line, and one that can’t be shown costs you its amount times the multiple.
What moves the multiple
The two-to-four range is a rule of thumb, not a quote. Within it, a buyer is pricing risk: how likely the SDE is to keep arriving after you leave.
- How much it needs you. The biggest one for most small service businesses. Owner dependency can take a large slice off the price on its own.
- How steady the profit is. Three flat or rising years beat one great year.
- How spread out the customers are. If one client is a third of revenue, a buyer prices in losing them.
- How much revenue repeats. Contracts, memberships and regulars are worth more than one-off jobs.
- Size. Larger SDE tends to attract more buyers and a higher multiple.
- The premises. A lease with years left that the buyer can take over is worth something. One ending next year is a risk.
From multiple to date
Same business, $250,000 of SDE. The owner’s household spends $6,000 a month, so at a 4% withdrawal rate the FI number is $1.8 million. They have $400,000 invested.
| Multiple | Price | What lands (70%) | Invested after the sale | Years to $1.8 million, nothing more saved |
|---|---|---|---|---|
| 2 times | $500,000 | $350,000 | $750,000 | 18 |
| 3 times | $750,000 | $525,000 | $925,000 | 14 |
| 4 times | $1,000,000 | $700,000 | $1,100,000 | 11 |
Assumptions: sold today; 5% a year after inflation; counted in whole years. “What lands” is 70% of the price, the middle of the 60% to 80% many owners keep after earn-out risk, fees and tax. After the sale, other work covers the household’s spending but saves nothing. Without a sale, the same $400,000 would take 31 years to grow to $1.8 million on its own.
One turn of the multiple was worth three to four years here.
If you’re weighing a sale, work backwards from the price you’d need, then compare selling with keeping it.
What the brokers get right
A business broker sees real sales of businesses like yours, and many will give you a view of your multiple for free. That’s a better number than any rule of thumb, including this one. Use it in the table above in place of 2, 3 and 4.
Run your own
Open the calculator, pick “I already own one” and put in your SDE, the multiple and how long the business runs without you. It shows the price, what lands after the earn-out, fees and tax, and your date whether you sell now or keep it.
Illustrative numbers, not advice. I’m not a licensed adviser. Valuation, tax and deal structure are questions for the people you pay to answer them.