What is Seller Discretionary Earnings (SDE): An Overview

Seller Discretionary Earnings (SDE) is a key factor in establishing a corporation's value in the field of business acquisitions, especially in the context of smaller deals. SDE is a financial indicator that, in comparison to the frequently used Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), provides a more thorough picture of a small business's profitability and the cash flow being produced. We will examine the idea of SDE, discuss why it is preferred in smaller acquisition agreements, and highlight the main distinctions between SDE and EBITDA. We'll also give a real-world example and list each element that goes into calculating a small business' SDE. This is a critical philosophy for you as the acquisition entrepreneur to understand as we apply these principles as we source deals on a weekly basis.

What is Seller Discretionary Earnings (SDE)?

Seller Discretionary Earnings, often referred to as "owner's earnings" or "adjusted cash flow," is a financial metric used to evaluate the financial performance of a small business. Unlike EBITDA, which is typically employed for larger corporations, SDE is specifically tailored for smaller businesses. SDE aims to provide a more accurate representation of a small business's true earning potential by accounting for various owner-related expenses and discretionary spending.

Why is SDE Used for Smaller Acquisition Deals?