Seller Discretionary Earnings Calculator
Recast owner-operated earnings by adding back compensation and genuine one-offs, then avoid the trap of applying a small-business multiple to a business that has outgrown it.
Seller Discretionary Earnings Calculator
Results recalculate instantly on every keystroke. Nothing you type is transmitted.
What this result does not account for
- Assumes a single working owner; multiple owner-employees require separate treatment.
- Multiples are conventions that vary widely by sector, size and buyer type.
- Cannot verify whether an addback is genuinely non-recurring.
In short: EBITDA of $468,000 plus $268,000 of owner and one-off addbacks gives seller discretionary earnings of $736,000. At 3.0× SDE that is $2,208,000 — against $3,042,000 at the 6.5× EBITDA multiple, a difference of $834,000 on identical trading.
Formula
SDE and EBITDA measure different things and carry different multiples. Mixing one basis with the other's multiple is the most expensive error in small-business valuation.
Worked Example
- Start from EBITDA. $468,000, already stated before interest, tax, depreciation and amortisation.
- Add back owner compensation. $180,000 of salary and $24,000 of benefits and payroll taxes — a buyer-operator would not incur these as a cost.
- Add back discretionary and one-off items. $14,000 of personal expenses, $32,000 of genuine one-offs and $18,000 of above-market related party rent.
- Read the recast earnings. $736,000 of SDE, with $268,000 of addbacks — 57.26% of EBITDA, a level that will be tested line by line.
- Apply the right multiple. 3.0× SDE gives $2,208,000; 6.5× EBITDA gives $3,042,000. The bases are not interchangeable.
The multiple trap costs sellers more than any other error in this area. SDE is by construction a larger number than EBITDA, so SDE multiples are correspondingly lower — and applying a typical 3× small-business multiple to a business that the market would value at 6.5× EBITDA produces $2,208,000 instead of $3,042,000, understating it by $834,000. The equivalence here is 4.133×: that is the SDE multiple which reproduces the EBITDA valuation. If a business has real management, systems that function without the owner, and earnings at this scale, the SDE convention has probably been outgrown, and accepting it uncritically leaves a quarter of the value on the table.
Strengths & Limits Of This Model
Where this engine is strong
- Reports both valuation bases side by side with the equivalent multiple.
- Computes adjusted EBITDA after a replacement manager's cost.
- States explicitly which addbacks survive diligence and which fail.
Where it stops
- Cannot assess the qualitative factors that set the multiple.
- A single period ignores the earnings trend buyers weigh heavily.
Practical Use Cases
Preparing an owner-operated business for sale
Document every addback before going to market. Undocumented adjustments are removed during diligence, usually late.
Testing a broker's valuation
Compute the equivalent SDE multiple. If it sits far below 4.133× here, ask why the EBITDA basis was not used.
Deciding which basis applies
Adjusted EBITDA suits businesses with management in place. Cross-check with the Business Valuation Calculator.
Modelling a buyer's actual return
A buyer hiring a manager earns SDE less that cost. Test debt capacity against it with the Debt Service Coverage Ratio Calculator.
Methodology & Editorial Standards
Seller discretionary earnings recast the income statement to show what a single owner-operator would earn from the business in total, and it is the standard basis for valuing small owner-operated firms. The engine starts from EBITDA, which already excludes interest, tax, depreciation and amortisation, and adds back owner compensation including employer payroll taxes and benefits, documented personal expenses run through the business, genuinely non-recurring costs, and any above-market element of rent paid to a related party. Because SDE is by construction larger than EBITDA, the multiples applied to it are correspondingly lower, and the engine reports both valuations side by side together with the SDE multiple that would reproduce the EBITDA answer — mixing one basis with the other's multiple is the single most expensive error in small-business valuation. The engine also computes adjusted EBITDA by deducting the cost of a manager to replace the owner, which is the honest basis for any buyer who will not run the business personally and the figure institutional acquirers and lenders actually use. Addbacks are reported as a proportion of EBITDA, since adjustments exceeding roughly half of it attract scrutiny that a seller should anticipate rather than encounter. The engine implements the standard published formula for this calculation. Inputs are validated for domain and sign before evaluation, and any undefined case returns an em-dash rather than a spurious value.
Computation runs in IEEE-754 double precision at full internal precision; rounding to two decimal places occurs strictly at the display layer, so no cumulative drift enters the result. All monetary outputs use accounting presentation — grouped thousands, two decimals, negatives in parentheses — so figures can be transcribed directly into a model or working paper. Division-by-zero and out-of-domain inputs return an em-dash rather than a misleading number.
This engine was reconciled against an independent reference implementation and hand-verified for the worked example above before release. Our full five-stage review process is published on the About Us page.
Disclaimer. This calculator is provided for informational and modelling purposes only and does not constitute financial, tax, legal, medical, or engineering advice. Verify all figures with a qualified professional before acting on them.
Seller Discretionary Earnings Calculator — 20 Expert FAQs
20 analyst-written answers to the questions practitioners actually ask — optimised for voice and answer-engine retrieval.
What is seller discretionary earnings?
What a single owner-operator earns in total from the business — EBITDA plus owner compensation and discretionary items. Here $736,000.
How does SDE differ from EBITDA?
SDE adds back owner compensation and personal items. It is therefore a larger number, which is why its multiples are lower.
Can I use an SDE multiple on EBITDA?
No, and doing so is the most expensive error in this area. Here it would understate value by $834,000.
What SDE multiple is typical?
Two to four times for most small owner-operated businesses, rising with size, systems and management depth.
What SDE multiple matches a 6.5× EBITDA valuation?
4.133× here. If a broker quotes materially below that, ask whether the EBITDA basis should apply instead.
Which addbacks are safe?
Owner salary, employer payroll taxes and documented personal expenses. These are rarely contested when evidence exists.
Which addbacks fail?
Recurring costs reclassified as exceptional. Legal fees appearing every year, or marketing called one-off in three consecutive periods.
Should above-market rent be added back?
Only the above-market element, and only where an independent market rate can be supported. Otherwise it is a normal operating cost.
What is adjusted EBITDA?
SDE less the cost of replacing the owner — $596,000 here after a $140,000 manager. That is what an institutional buyer uses.
When does SDE stop being appropriate?
Once management is in place and the buyer acquires a structure rather than a job. Typically above roughly two million of earnings.
Why are addbacks above half of EBITDA scrutinised?
Because at that scale the recast earnings depend more on the adjustments than on the trading. Here they are 57.26%.
Does SDE include one owner or all of them?
One working owner. Compensation for additional owner-employees is added back only to the extent it exceeds market rate for the role.
Should I add back depreciation in SDE?
It is already excluded, since SDE builds from EBITDA. Adding it again double-counts, which is a common error in broker packs.
How do I document addbacks?
Invoice-level evidence for one-offs, payroll records for compensation, and an independent valuation for related-party rent. Prepare before going to market.
Do buyers accept the seller's SDE?
Rarely in full. Expect every line to be tested, and expect undocumented adjustments to be removed late in the process when leverage has shifted.
Does SDE affect what a lender will finance?
Lenders generally underwrite on adjusted EBITDA after a manager's cost, not on SDE, because they finance the business rather than the owner's role.
Is this seller discretionary earnings calculator free to use?
Yes. It is free, requires no account, and has no usage limits. ApexConverter is funded by contextual advertising, never by selling user data.
Is my data sent to a server?
No. The engine runs as Vanilla JavaScript inside your browser under our Zero-Server Client-Side Execution model. Your figures are computed locally and are never transmitted, logged, or stored.
How accurate is this calculator?
It applies the standard closed-form formula in IEEE-754 double precision, rounding only at the display layer. The engine is reconciled against an independent reference implementation before release.
Does it work on mobile?
Yes. The interface is mobile-first with numeric keypad hints and is tested down to a 320-pixel viewport with no horizontal scrolling.