SDE stands for "Sellers Discretionary Earnings" and is a measure of the earnings of a business. It is a metric used to determine the historical cash flow of a business and is a recasting process that starts with the net profit of a business, from either the business tax return or the year-end income statement. SDE allows a buyer to quickly compare two companies for valuation purposes. It is the most common measure of cash flow used to value a small business. SDE represents the entire financial benefit your business would provide to one full-time owner-operator. It is calculated by taking your businesss net profit and adding back or "recasting" certain discretionary expenses. Once SDE is calculated, buyers will dig deeper into a multitude of other factors, such as the growth rate of the company, gross margins, customer concentration, and hundreds of additional factors.
It is important to note that SDE is not the same as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which is a similar concept but is typically used for larger businesses with more disciplined financial reporting. EBITDA allows investors to compare your business against others in the same industry by removing expenses that skew a fair comparison.
In summary, SDE is a measure of the earnings of a business that allows a buyer to compare two companies for valuation purposes. It is calculated by taking a businesss net profit and adding back certain discretionary expenses.
