What SDE measures
Seller's Discretionary Earnings (SDE) is the standard valuation basis for owner-operated small businesses: net income plus the owner's salary, personal expenses run through the business, one-time or non-recurring costs, interest, and non-cash charges like depreciation and amortization added back. It answers one question: what would this business actually generate for a new owner who works in it full time?
SDE differs from EBITDA in one important way: EBITDA assumes a professional management layer already exists and is paid market rate. SDE assumes the buyer IS that manager, so the owner's compensation is added back rather than treated as a real cost. Most main-street and lower-middle-market operating businesses (the bulk of what's listed here) are valued on SDE precisely because the owner's labor is a real, load-bearing part of day-to-day operations.
Turning SDE into a price
The asking price a seller sets, and the price a buyer should underwrite to, is typically expressed as a multiple of SDE: price = SDE x multiple. The multiple itself moves with risk and quality signals: customer concentration, owner dependence, growth trend, industry, and deal size all push it up or down. A business that runs without the owner physically present for weeks at a time is a fundamentally different risk profile than one that closes the day the owner takes a vacation, even at identical SDE.
This is why two listings with the same SDE can carry very different asking prices, and why a buyer underwriting an operating business should treat the multiple, not just the SDE figure, as the variable that needs the most scrutiny in diligence.
What to verify before you rely on a listed SDE
A listed SDE figure is a seller's or broker's claim until it is verified against tax returns, bank statements, and (ideally) a quality-of-earnings review. Add-backs are the most common place SDE gets inflated: legitimate add-backs are one-time and non-operating; a pattern of recurring 'one-time' add-backs every year is a red flag, not a discount.