Seller's discretionary earnings (SDE)
SDE is the total financial benefit one owner-operator takes from a small business in a year, used to value Main Street companies in BC
Seller's discretionary earnings, usually shortened to SDE, is the profit of a small business before tax, interest, depreciation and amortisation, plus the full compensation and personal benefits of one working owner, plus any one-time or non-operating expenses. It represents the cash an owner-operator could take out of the business in a year if they ran it themselves and paid themselves nothing.
SDE is the standard earnings measure for Main Street businesses in British Columbia, meaning companies small enough that the buyer will likely be an owner-operator. It differs from normalised EBITDA, which deducts a market salary for the owner and is used for larger companies where the buyer will hire a manager. Using the wrong measure for the size of business is one of the most common reasons an asking price is rejected.
In practice, SDE is built from the financial statements by adding back the owner's salary, benefits, personal vehicle, travel, family members paid for little work and other discretionary items, with each add-back documented so a buyer's accountant can verify it. The BizSell.ca valuation report presents SDE and normalised EBITDA side by side and applies a multiple to whichever suits the business. Owners who track discretionary expenses carefully in the years before a sale make this step faster and far more credible.
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