SDE Calculator

What SDE actually measures

SDE answers a buyer's most fundamental question: "If I bought this business and ran it myself, how much could I extract per year?" The answer is EBITDA plus everything the current owner is taking out of the business — their salary, their healthcare, their retirement contributions, and any personal expenses being run through company books.

For a single-owner business, SDE is typically substantially higher than EBITDA. A business with $1M revenue and 15% EBITDA margin ($150K) where the owner pays themselves $120K plus runs $30K in legitimate add-backs through the business would have SDE of $300K — a 30% margin. That's the number a buyer evaluates.

SDE is the right metric for businesses under about $5M revenue. Above that size, businesses are usually run by professional management rather than owner-operators, so the EBITDA-based valuation conversation makes more sense.

The formula

SDE = EBITDA + Owner's compensation + Owner's perks

The math is trivial. The judgment lives in what counts as "owner's perks." Most calculators wave their hands at this question; this one categorizes add-backs explicitly because credibility is the difference between a fast deal and a deal that collapses in diligence.

The three categories of add-backs

Conservative (almost always accepted)

• Owner's salary (full amount, not just the "above market" portion)
• Employer-side payroll taxes on owner salary
• Owner's healthcare insurance paid through the business
• Employer retirement contributions for owner
• One-time legal, professional, or consulting fees
• One-time restructuring or relocation costs

These survive almost any due diligence process. A buyer expects to pay an operator (themselves, or a hired GM), so removing the current owner's comp is universally accepted. One-time items that won't recur for the buyer are also non-controversial.

Moderate (defensible with documentation)

• Personal use of business vehicle
• Personal phone, internet, subscriptions
• Spouse or family compensation above market rate (excess only)
• Personally-used professional dues, conferences, certifications

These are commonly accepted but require supporting documentation — mileage logs for vehicle, cell records for phone, T4s and market comparisons for family compensation. The discipline: treat these as line items that need defense, not as freebies.

Aggressive (proceed with caution)

• "Discretionary" travel, meals, entertainment
• Country club, gym, sports tickets
• Charitable contributions through the business
• Family salaries claimed as no-work
• Other items the owner views as personal

These often appear on owner add-back schedules but get haircut to zero by sophisticated buyers. The honest framing: include them only if you have airtight documentation, and remember that aggressive add-backs damage credibility on the schedule overall — if a buyer sees aggressive items, they scrutinize the moderate ones more carefully too.

The credibility flags

Two metrics determine whether your SDE schedule survives diligence:

1. Total add-backs as a percentage of revenue. Below 15% is normal; 15-25% is high but defensible; 25-40% is suspicious and will be heavily scrutinized; above 40% is implausible and will be haircut hard. The headline number doesn't survive at that level — buyers move to the conservative SDE instead.
2. Aggressive share of total add-backs. If aggressive items make up more than 30% of your add-back stack, credibility on the entire schedule degrades. Buyers haircut aggressive items to zero and discount the rest.

The calculator surfaces both metrics and shows two SDE figures — the headline (all add-backs) and the conservative SDE (only conservative add-backs). The conservative figure is often the more useful number for valuation conversations, because it's the one a buyer is likely to accept without negotiation.

Valuation multiples — ranges, never point estimates

Once SDE is computed, the typical small-business valuation conversation goes:

Business value = SDE × industry multiple

For owner-operator businesses under $5M revenue, typical multiple ranges by industry:

• Professional services: 2.0x to 3.5x SDE
• Construction and trades: 1.8x to 3.0x SDE
• Manufacturing: 2.5x to 4.0x SDE (higher because asset-backed)
• Retail: 1.5x to 2.8x SDE
• Restaurants: 1.5x to 2.5x SDE
• E-commerce: 2.0x to 4.0x SDE (wide variance by category)

The calculator above shows the range for your industry. It deliberately doesn't pick a point inside the range, because the actual multiple depends on factors a calculator can't assess — customer concentration, growth trend, recurring vs. project revenue, owner dependence, lease/asset terms, and a dozen other deal-specific details.

A real valuation requires a broker, M&A advisor, or appraiser who can evaluate those factors. The multiple ranges here are a starting point for that conversation, not a substitute for it.

A worked example

A services business doing $1.2M revenue with 12% EBITDA margin ($144K). The owner pays themselves a $130K salary plus $13K in employer-side payroll taxes, $9K in healthcare, and $18K in retirement contributions. The business covers the owner's phone ($2K) and a portion of vehicle expenses ($10K). One-time legal fees this year were $20K from a settled dispute.

Conservative add-backs: $130K + $13K + $9K + $18K + $20K = $190K

Moderate add-backs: $2K + $10K = $12K

Total add-backs: $202K (16.8% of revenue — normal range)

SDE: $144K + $202K = $346K (28.8% margin, healthy for services)

Conservative SDE: $144K + $190K = $334K

At services multiples of 2.0-3.5x, headline valuation range is ~$690K to $1.21M; conservative range is ~$668K to $1.17M. The gap is small because the schedule is honest — moderate add-backs are documented and aggressive items aren't in the schedule. A clean schedule like this typically sells at the upper end of the range when growth and concentration metrics support it.

Common mistakes

1. Stacking aggressive add-backs. The most common reason small business deals fall apart 60-90 days into diligence. Buyers identify aggressive items, haircut them, then lose trust in the rest of the schedule.
2. Adding back full family salary instead of the excess. If your spouse genuinely works in the business at market rates, none of their salary is an add-back. Only the EXCESS over market rate is — and only with documentation.
3. Forgetting payroll taxes on owner salary. The employer-side payroll taxes on the owner's salary are a legitimate conservative add-back. Many owners forget them.
4. Counting the same thing twice. If you already adjusted EBITDA for owner above-market compensation, don't also add back the entire owner salary as a separate SDE line. For SDE, start from clean (un-adjusted) EBITDA.
5. Treating SDE and EBITDA as interchangeable. They aren't. EBITDA strips out owner economics; SDE adds them back. For businesses under $5M, SDE is the buyer's metric. For businesses above $5M with professional management, EBITDA is.
6. Listing without a Quality of Earnings report. For deals over $1M in transaction value, getting a CPA to prepare a QofE before listing tightens the SDE schedule the same way buyer diligence will. Saves time and renegotiation.

FAQ

What's the difference between SDE and EBITDA?

EBITDA = earnings before interest, taxes, depreciation, and amortization. SDE = EBITDA plus owner compensation plus owner perks. SDE is the standard metric for owner-operator businesses under ~$5M revenue; EBITDA is the standard for professionally-managed businesses. The difference can be substantial — 15-30 percentage points of margin, sometimes more.

Should I use SDE or EBITDA for valuation?

For owner-operator businesses under $5M revenue, SDE is more common. Above $5M with professional management, EBITDA is more common. In the middle, both are sometimes used; the buyer's preference often drives which gets emphasized. If you're working with a broker, ask which they'll lead with.

What if there are multiple owners?

SDE is technically defined for single-owner businesses. For multi-owner cases, the convention is to add back ONE owner's full compensation (the role a buyer would replace) and treat other owners' compensation as legitimate operating expense. The calculator above assumes single-owner; multi-owner cases warrant a broker conversation.

How do I price family member salaries?

Use the market rate a non-family employee would command for the same role. The EXCESS of family salary over that rate is the add-back; the rest is operating expense the buyer would actually pay. Family members not actually doing market-rate work are a flag for buyers — most insist on removing them before close.

Will the calculator give me a valuation?

No, deliberately. It computes SDE and shows industry multiple ranges. A real valuation requires understanding customer concentration, growth trend, lease/asset terms, owner dependence, and dozens of other factors that vary deal-by-deal. The right conversation is with a business broker, M&A advisor, or certified appraiser who can evaluate those factors against your specific situation.