Seller’s Discretionary Earnings (SDE) is the pre-tax profit of a business adjusted to include the owner’s salary, personal expenses run through the business, and other discretionary items that benefit the owner. SDE reflects the total cash benefit available to a new owner-operator and is the standard valuation metric for businesses with revenues typically below A$5 million or enterprise values below A$5 million.
SDE vs EBITDA: Understanding the Difference
Both SDE and EBITDA are earnings metrics used in business valuation, but they serve different purposes and are appropriate for different business sizes.
EBITDA adds back interest, taxes, depreciation, and amortisation to net profit. It measures the operating earnings available to all capital providers, regardless of how the business is financed. EBITDA is the standard for mid-market M&A ($5M+ enterprise value) where the buyer will typically not be managing the business personally.
SDE goes further, also adding back:
- The owner’s salary and payroll taxes (because a new owner-operator will take a different salary)
- Personal expenses run through the business (vehicles, travel, insurance that benefits the owner personally)
- Non-recurring or discretionary expenses (one-off costs, owner lifestyle expenses)
- Depreciation and amortisation (same as EBITDA)
- Interest on business debt (same as EBITDA)
SDE = Net Profit + Owner’s Compensation + Owner’s Discretionary Expenses + Depreciation + Amortisation + Interest
SDE is used for smaller businesses — typically those valued under $5 million — where the assumption is that the buyer will replace the seller in the business. EBITDA is used for larger businesses where professional management will run operations.
SDE Multiple Ranges (Australia, 2026)
Small businesses trade at 2–4x SDE in most sectors, significantly lower than mid-market EBITDA multiples. The range reflects business quality, growth trajectory, and degree of owner dependence:
| Sector | SDE Multiple Range |
|---|---|
| Professional services (sole practitioner) | 1.5–3x |
| Trade services (plumbing, electrical, HVAC) | 1.5–2.5x |
| Retail (bricks-and-mortar) | 1.5–2.5x |
| Hospitality (café, restaurant) | 1–2x |
| Healthcare (sole-practitioner GP, allied health) | 2–3.5x |
| E-commerce (product-based) | 2–4x |
| Accounting practice | 0.8–1.2x revenue (not SDE-based) |
| Digital businesses (content, affiliate, SaaS micro) | 2.5–4.5x |
Lower end reflects high owner dependence, declining revenue, or difficult-to-transfer relationships. Upper end reflects growing revenue, transferable systems, and recurring client base.
Why SDE Matters for Business Owners
For small business owners, SDE is often significantly higher than the reported net profit shown in financial statements. Owners of small businesses routinely run personal expenses through the business — a family car, personal travel, spouse salaries, superannuation above standard rates, mobile phones, and subscriptions that are not purely business expenses.
These “add-backs” can represent 20–50% of the reported net profit and, when properly documented, can materially increase the SDE figure and therefore the business valuation.
As Daniel Bae, Founder & CEO of Amafi and advisor on $30B+ of transactions, explains: “Many business owners undervalue their businesses because they present to buyers on net profit — which has been reduced by years of legitimate tax minimisation. The first step in preparing for sale is always to restate the earnings on a normalised basis, including all the add-backs, so buyers can assess the true cash earnings power of the business.”
How to Calculate Your SDE
Start with net profit (or net loss) from your financial statements, then add back:
- Owner’s salary — what you paid yourself, including payroll taxes and superannuation
- Family member salaries — any compensation paid to family members above what a replacement employee would cost
- Owner’s personal expenses — vehicle, travel, meals, and entertainment with a personal component
- One-off expenses — legal fees for non-recurring matters, costs to fix a specific problem
- Depreciation — non-cash expense
- Amortisation — non-cash expense
- Interest expense — to show earnings before financing decisions
- Non-operating income/expense — remove items unrelated to the core business
The resulting figure is your Seller’s Discretionary Earnings. Multiplied by your sector’s SDE multiple, this gives an indicative enterprise value.
SDE vs EBITDA: Which Applies to Your Business?
| Factor | Use SDE | Use EBITDA |
|---|---|---|
| Business size | Under $5M enterprise value | Over $5M enterprise value |
| Owner role | Owner works full-time in business | Management team operates the business |
| Buyer type | Individual owner-operators | PE funds, strategic acquirers |
| Revenue scale | Under $3–5M revenue | Above $5M revenue |
If you are unsure which metric applies to your business, speak with an M&A advisor. Businesses at the threshold — $2–5M EBITDA or enterprise values of $5–15M — may be presented on either basis depending on the buyer universe.
Book a valuation meeting with Amafi to get a clear view of your business’s SDE, EBITDA, and the valuation range you can realistically achieve in the current market.
Related Terms
- EBITDA — the mid-market earnings metric; used for larger businesses
- EBITDA Multiple — the valuation ratio used for mid-market transactions
- Quality of Earnings — the analysis buyers use to validate normalised earnings
- Enterprise Value — the total business value derived from the SDE or EBITDA multiple
- Normalised Working Capital — the working capital adjustment in business sales
Related Terms
EBITDA Multiple
A valuation ratio that expresses the enterprise value of a business as a multiple of its EBITDA — used in M&A to compare valuations across companies and assess whether a deal is fairly priced.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation — a widely used financial metric in M&A that measures a company's operating profitability before the effects of capital structure, tax policy, and non-cash accounting charges.