If you’re a small business owner and are looking to sell your business, you need to know your Seller’s Discretionary Earnings (SDE). For the buying and selling of small businesses, SDE helps determine a business’s financial health through an accurate business valuation. Buyers want to know the worth of the business they’re interested in, so an SDE is the best way to provide them with the necessary information to maintain their interest in purchasing.
Because SDE helps determine financial health, it also plays a large role in finding business value. Buyers want as much information as possible when considering buying a business, and SDE provides them the best metric to figure out what the total financial benefit will be for them if they invest. From existing cash flow to benefits and other owner-specific expenses, SDE gives a more consistent valuation of what the true cash flow is for the owner. So, if you’re a buyer, you can take advantage of a provided SDE to assess whether a business generates enough money to be a worthwhile investment. If you’re a seller, you need to include SDE with your other valuation efforts to ensure your asking price has financial metrics to support it.
If SDE is important for determining an owner's salary, excess compensation, and more for a small business owner, how is it calculated?
First, you start with the pre-tax net income for business. Let’s say this amount is $100,000. SDE takes this and adds some other financial factors together to determine SDE. For example:
Someone looking to buy this theoretical business looks at this SDE to see what the true value of the business is to them. Even when considering operating expenses, working capital, etc, a potential buyer will be more willing to consider your business if they see your SDE numbers compared to just the net income.
In the world of business finances, there’s a few different methods that can be used to show the true value of a business. However, depending on what type of business you are, there’s usually a better choice for this when comparing it to other methods. Two of the most common that you have likely heard as a business owner are seller’s discretionary earnings (SDE) and earnings before interest, taxes, depreciation, and amortization (EBITDA).
Although they are very similar, SDE typically applies to small businesses. This is because small business owners are usually still working within their business to some degree, which means their labor and its earnings are added to the takeaway value of the business. This happens because it can be difficult to distinguish between the profits of your business and the compensation that you earn as a working owner. SDE tries to alleviate this by mixing the profits of your business alongside compensation for one number for buyers to consider.
By contrast, mid- to large-sized businesses tend to utilize EBITDA. This is because most businesses larger than a small business hire and pay managers or CEOs to run them. So, because the one operating the business isn’t also the owner, their compensation doesn’t need to be considered or included as a benefit in the value of the business. Essentially, the manager/CEO salary is now an expense instead of added back to the total value.
If you’ve never had to find your SDE or need advice regarding a proper valuation of your business, then Advanced Business Brokers are your best resource. By working with business brokers, you guarantee the valuation for your business is as accurate as possible for the best results on the market. For each part of your SDE, our team can help you find the correct numbers to make a fair selling price. For this assistance and more from ABB, reach out soon!
If you’re thinking about selling your business and don’t know where to start, consider speaking with our team here at Advanced Business Brokers. We specialize in brokering and advising exit plan strategies for various sizes/sectors of businesses.
With over 25 years of dedicated experience, Bob empowers small business owners in the Indianapolis metro area to achieve their entrepreneurial visions, whether by building scalable operations or crafting highly sellable entities. For three decades, he’s cultivated a robust network of owners, buyers, and strategic partners, a resource he fully leverages to help clients meet their unique objectives.
Bob’s expertise spans a diverse range of industries, including trade-based businesses like construction, HVAC, skilled trades, and manufacturing, as well as white-collar professional service firms such as law, finance, marketing, and technical services. Beyond his client work, Bob actively contributes to his community, serving as Treasurer for the Boone County Chamber Board and as well as a board member for both the Central Indiana Police Foundation (CIPF) and Fiscal Sponsorship Allies (FSA).
Bob holds a degree in Mechanical Engineering Technology from Purdue University in West Lafayette, Indiana, and teaches there as well in the Certificate in Entrepreneurship and Innovation Program, which is ranked among the Top 50 programs in the U.S.
He lives with his wife Lori in Zionsville, just outside Indianapolis, and in his free time, he enjoys working on his home, playing golf, and traveling.
With a degree in psychology and a professional background in social work, Marissa
brings a people-centered lens to every project. Her experience includes being a Project
Planning Specialist at GE Aerospace, creating efficient processes and structures that
help teams work smarter and stay aligned. Marissa joins the Main Street Market Maker
team with Advanced Business Brokers to dedicate time and attention to smaller
business opportunities and provide excellent and supportive customer service.
Outside of work, she is a mom of three young men who finds joy in the everyday chaos
of family life. She loves strong coffee, warm beaches, and any excuse to spend time in
the sunshine. Hot yoga and hammocking are some of her favorite ways to reset and
stay grounded and help her show up with more presence both at home and in my
professional life.
Steve brings more than 20 years of experience as a legal and financial professional to
his work with business owners preparing for transition and sale. He advises owners and
their families through every stage of the exit planning and transaction process, with a
focus on thoughtful assessment, risk management, and strategic value enhancement.
Steve is a Certified Exit Planning Advisor (CEPA®) and an active member of the Exit
Planning Institute. He previously served as Director of the Small Business Development
Center in Toledo, Ohio, where he worked closely with entrepreneurs across a wide
range of industries on growth, financing, and succession planning initiatives.
Earlier in his career, Steve practiced law with a nationally recognized Chicago-based
law firm and held roles in capital markets and commercial banking with leading financial
institutions. This multidisciplinary background allows him to approach business
transactions with a practical understanding of legal, financial, and operational
considerations.
As a business broker, Steve specializes in industrial and manufacturing companies,
skilled trades, and professional service firms, including marketing, staffing, and financial
services businesses. Steve earned his Juris Doctor from Loyola University Chicago
School of Law and a bachelor’s degree in economics from the University of Notre
Dame. He lives in the Toledo area with his wife and two daughters. Outside of work, he
enjoys traveling, cooking, and spending time at his family’s lake house.
A lifelong resident of Fort Wayne, Indiana, Dr. Mark Hagar brings decades of hands-on experience in small business ownership, acquisitions, and turnarounds to his role as a business broker. Over his distinguished career, he has acquired and operated more than 20 companies and engineered over 50 successful turnarounds, giving him a uniquely practical understanding of what makes businesses succeed, and sell. His portfolio spans manufacturing, distribution, and service firms in industries including printing, education, military contracting, aerospace, and orthopedics. This diverse background enables him to identify value, anticipate buyer needs, and structure complex deals with confidence and precision.
Mark holds a Doctorate in Business Administration (DBA) from Cranfield University’s School of Management in Bedford, England—one of Europe’s leading business schools. His research on small business resilience and operational excellence has been recognized by the Small Business Institute (SBI), the United States Association for Small Business and Entrepreneurship (USASBE), and the International Council for Small Business (ICSB).
In addition to his business career, Dr. Hagar has served as a member of faculty at several institutions of higher education, including Holy Cross College (Notre Dame), Trine University, and the University of Saint Francis. He also hosted Your Business Matters, a small business–focused radio show and podcast for more than a decade and is the author of Small Fortunes – the Acquisition Entrepreneur’s Guide to Buying a Profitable Small Business.
A passionate advocate for entrepreneurs, Mark previously chaired the Indiana Leadership Council for the National Federation of Independent Business (NFIB), representing small business owners before state and federal legislators. He currently serves as President of the Allen County, Indiana Economic Development
Commission.
As a broker, Mark specializes in industrial, manufacturing, and distribution firms, with particular expertise in special situations, distressed assets, and complex transitions where experience, creativity and discretion are central to success.