Seller's discretionary earnings (SDE), as your baseline
Last updated
Quick Answer
After close, SDE is not a valuation input — it is the earnings baseline the business was sold on and the one you are now measured against.1,2
What it is
Seller's discretionary earnings adds back the owner's compensation and discretionary expenses to operating profit, producing the figure a small business is typically priced on. The pre-close use of that number — what the business is worth — is a deal question and belongs to the deal side. The post-close use is different and more uncomfortable: it is the level of earnings the price assumed, and the gap between it and what the business produces under your ownership is your first-year problem statement.1,2
Operational context
What good looks like
Why It Matters
The add-backs that made the number attractive are, one by one, decisions you now have to either replicate or explain. Working out which of them were genuinely discretionary and which were the previous owner doing three jobs for free is most of what the first quarter of financial work actually is.1
Term Family
Related concepts
Frequently Asked Questions
What is Seller's discretionary earnings (SDE), as your baseline in venture capital?
Seller's discretionary earnings adds back the owner's compensation and discretionary expenses to operating profit, producing the figure a small business is typically priced on. The pre-close use of that number — what the business is worth — is a deal question and belongs to the deal side.
Why is Seller's discretionary earnings (SDE), as your baseline important for startups?
Understanding Seller's discretionary earnings (SDE), as your baseline is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.A2-08 — Ruback & Yudkoff, HBR Guide to Buying a Small BusinessRuback & Yudkoff, HBR Guide to Buying a Small BusinessAcademic / institutional primary(After close, SDE is not a valuation input — it is the earnings baseline the business was sold on and the one you are now measured against.)primary · A2 · kpi-instrumentation · metric
- 2.B2-01 — Permanent Equity content libraryPermanent Equity content libraryPractitioner primary(After close, SDE is not a valuation input — it is the earnings baseline the business was sold on and the one you are now measured against.)secondary · B2 · kpi-instrumentation · metric
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