Business Valuation with SDE: A Practical Framework
Seller's Discretionary Earnings (SDE) is a common framework in main-street business transactions because it estimates the owner benefit available to a single operator. The quality of an SDE analysis depends less on spreadsheet complexity and more on whether adjustments are transparent, supportable, and relevant to future operations.
What goes into SDE
- Start from operating profit using consistent accounting periods.
- Add back owner compensation and owner-specific discretionary items where appropriate.
- Separate one-time/non-recurring costs from recurring operating expenses.
- Keep an audit trail for each adjustment to reduce buyer friction.
Example local sell guides
Why transferability changes value
Buyers evaluate more than historical earnings. They ask whether the business can perform after ownership changes. Clear SOPs, role coverage, vendor continuity, and lease durability often increase confidence in projected continuity, while heavy owner dependence can discount perceived value even when trailing earnings look strong.
What sellers can do before going to market
- Reconcile books and produce a clear monthly trend narrative.
- Prepare a conservative, evidence-backed SDE bridge.
- Document owner duties and delegation options.
- Organize lease, permits, and key vendor dependencies early.
This guide is educational only and not legal, tax, or investment advice.