Seller's discretionary earnings (SDE): how to work out what your business earns its owner

Short answer: seller’s discretionary earnings (SDE) is what a small business earns for one full-time owner-operator in a year. Start with net profit before tax and add back the owner’s own pay and pension or super, interest, depreciation, genuine one-off costs, and personal costs the business paid for the owner. A business with £46,000 of net profit, a £12,570 director’s salary and £21,430 of other add-backs has SDE of £80,000. Buyers and business brokers use SDE to price small owner-run businesses, usually as a multiple of it, so every add-back you can prove raises the price and every one a buyer rejects lowers it. Work it out for the last three years before you talk to anyone, with evidence for each add-back.

The SDE formula

Line	What it is
Net profit before tax	The Net Profit line of the Profit and Loss, before any company tax
add the owner’s pay	One owner’s wage or director’s salary, plus their pension or super, if it is in the Profit and Loss
add interest	Interest on loans and finance, because a buyer will fund the business their own way
add depreciation and amortisation	Accounting entries, not cash spent this year
add one-off costs	Costs that will not happen again, such as a flood repair or a one-time legal case
add personal costs	The owner’s personal share of costs the business paid, such as a car or phone
= Seller’s discretionary earnings	What one working owner takes out of the business, before tax and financing

Only one owner’s pay is added back. If two partners both work in the business, the second one is a cost a buyer would have to replace, so their pay stays in.

SDE vs EBITDA: EBITDA (earnings before interest, tax, depreciation and amortisation) keeps the owner’s pay in as a cost. SDE adds it back. SDE suits a business the buyer will run themselves; EBITDA suits a business big enough to have a manager, and the EBITDA calculator works it out. Types of profit shows where each sits on the Profit and Loss.

A worked example: a dog grooming salon in Bristol

These figures are made up. Jo owns a dog grooming salon through a limited company and is thinking of selling it in a year or two. She grooms full time, pays herself a director’s salary through payroll and takes the rest as dividends. Dividends are not in the Profit and Loss, so there is nothing to add back for them.

Year to 31 March 2026	£
Net profit before tax (Xero’s Net Profit)	46,000
add Jo’s director’s salary	12,570
add the company’s pension contributions for Jo	6,000
add interest on the van loan	2,400
add depreciation	7,600
add one-off: new flooring after a burst pipe, not covered by insurance	4,000
add Jo’s personal share of the car and phone costs	1,430
Seller’s discretionary earnings	80,000

46,000 + 12,570 + 6,000 + 2,400 + 7,600 + 4,000 + 1,430 = £80,000. That is £34,000 more than the Net Profit line, and it is the number a buyer who will groom full time cares about: what they could take out of the business before their own tax and loan costs.

Three years, not one

Buyers look at the trend. Jo’s SDE was £68,000 two years ago, £74,000 last year and £80,000 this year. The simple average is £74,000. A weighted average that counts this year three times, last year twice and the year before once is (80,000 × 3 + 74,000 × 2 + 68,000) ÷ 6 = £76,000. A buyer may use either, so a rising trend helps, and one good year on its own is not enough.

What the add-backs are worth

Brokers price small owner-run businesses as a multiple of SDE. The multiple depends on the industry, size, how much the business relies on the owner, and how steady the figures are, and only a broker or valuer can tell you what applies to yours. Using 2.5 times purely to show the arithmetic:

• At £80,000 of SDE, 2.5 times is £200,000.
• If the buyer rejects the flooring because the accounts show another leak repair two years earlier, SDE becomes £76,000 and the price £190,000. A £4,000 add-back moved the price by £10,000.
• If the personal car and phone costs have no evidence, the buyer may reject those too, which takes SDE to £74,570 and the price to about £186,400.

That is why each add-back needs a receipt, an invoice or a clear note, and why “one-off” costs that come back every year will be challenged.

To check whether a multiple makes sense, value the cash the business will make instead: discounted cash flow works one through for a cleaning company, and shows that $10,000 a year more free cash flow adds about $41,000 to the value. The terminal value guide shows how to turn a multiple into the growth rate it assumes, which is a quick test of whether a multiple is too high.

What it would cost to replace Jo

A buyer who would not groom full time has to pay someone to do Jo’s job. If a full-time groomer who could also run the salon costs about £34,000 a year including employer costs, the business earns 80,000 − 34,000 = £46,000 for an owner who does not work in it. That is close to the adjusted EBITDA (EBITDA plus the one-off and personal add-backs, less a market wage for the owner’s job), and it is the figure an investor-buyer would value. The same question is behind true profit: what the business earns once the owner’s time is paid at the market rate.

How to work out your SDE from Xero

1. Run Accounting › Reports › Profit and Loss for your last financial year, and use Compare with to add the two years before. Note Net Profit for each year. If a tax line is included, use the figure before it.
2. Find the owner’s pay. For a company, the director’s salary and pension or super are usually in the wages and pension accounts; run Account Transactions for those accounts to separate the owner’s share from staff. For a sole trader or partnership, the owner’s pay is drawings, which are not in the Profit and Loss, so there is nothing to add back.
3. Note interest and depreciation from the Profit and Loss.
4. List possible one-off and personal costs. Look through the larger expense accounts with Account Transactions, and write down the transaction, the amount and why it will not repeat. Attach the evidence in Xero or keep it in a folder.
5. Add it up for each year, then work out the simple and weighted three-year averages.

Menu names move between Xero releases and regions, so search Xero Central for the report name if your screen differs. If personal costs have been claimed as business expenses, talk to your accountant before you list them, because that is also a tax question.

Common mistakes

• Adding back two owners’ pay. Only one working owner is added back. Anyone else doing a job in the business is a cost the buyer keeps.
• Leaving out unpaid help. If a partner does the books for nothing, a buyer will have to pay someone. Take a fair wage off SDE rather than leave it out.
• Rent below the market rate. If you own the premises and charge the business little or no rent, a buyer will pay the market rent. Adjust for it.
• “One-off” costs every year. A repair, a legal bill or a recruitment fee that appears every year is a running cost. Buyers check the earlier years.
• Adding back costs the business needs. Marketing, training or equipment repairs that keep sales coming are not discretionary, even if you could cut them for a year.
• Using one year. Show three years, so the buyer sees the trend you would rather explain yourself.

Common questions

What is seller’s discretionary earnings? It is the total a small business earns for one owner who works in it full time, before tax and financing. Take net profit before tax and add back the owner’s own pay, interest, depreciation, one-off costs and personal costs the business paid. Buyers of small owner-run businesses use it to compare and price them.

How do you calculate SDE? Start with net profit before tax, then add one working owner’s wage or salary and their pension or super, interest, depreciation and amortisation, genuine one-off costs, and the owner’s personal costs paid by the business. For example, 46,000 of net profit plus 34,000 of add-backs gives SDE of 80,000.

What is the difference between SDE and EBITDA? EBITDA treats the owner’s pay as a cost; SDE adds it back. SDE fits a business the buyer will run themselves. EBITDA, often adjusted for one-off costs, fits a larger business with a manager in place, where a buyer will not be doing the work.

What can be added back to SDE? One owner’s pay and pension or super, interest, depreciation, amortisation, costs that genuinely will not repeat, and personal costs the business paid for the owner. Each one needs evidence, such as invoices or a written note, because a buyer will ask for it.

What multiple of SDE do small businesses sell for? It varies by industry, size, risk and how much the business depends on the owner, so there is no single answer. A business broker or valuer can tell you what businesses like yours have sold for. Steady or rising SDE over three years, with add-backs that can be proved, supports a higher multiple.

Is SDE the same as owner’s cash flow? Not quite. SDE is a profit figure, so it ignores what the business spends on new equipment, loan principal and changes in what customers owe. A buyer will also check that the cash in the bank followed the profit, so look at your cash flow over the same years.

Know what your business earns, every Monday

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