Buying a Business: How to Evaluate SDE and What It Means for You

If you're looking to buy a small business, every listing you see will include an SDE number. Seller's Discretionary Earnings is how small businesses are priced — but not every SDE is created equal.

Understanding how to evaluate SDE, what it actually means for your take-home income, and how to tell good SDE from inflated SDE is the difference between buying a great business and buying a headache.

What SDE Really Tells You as a Buyer

SDE represents the total economic benefit available to a single owner-operator. It's the owner's salary plus the business's profit plus non-cash expenses and discretionary add-backs.

When you see a listing that says "$350K SDE," here's how to translate that into what it means for your life:

SDE is not your take-home pay. It's the pool of money that needs to cover your salary, your debt service (if you're financing the purchase), reinvestment in the business, and profit. How much you actually pocket depends on how much you pay for the business and how you finance it.

The SDE-to-Income Math

Let's walk through what different SDE levels actually mean after you buy.

$150K SDE Business

Typical asking price at 2.5x: $375,000

At this level, you're essentially buying yourself a job that pays ~$96K. There's not much margin for error, and a bad quarter could mean you're not paying yourself. These businesses are typically owner-operated with no employees or very few employees.

$300K SDE Business

Typical asking price at 2.75x: $825,000

Now you're in a different position. You can pay yourself $120K and still have nearly $70K for reinvestment or cushion. The business likely has a small team and enough infrastructure that you're managing — not doing everything yourself.

$500K SDE Business

Typical asking price at 3x: $1,500,000

This is the sweet spot for many acquisition entrepreneurs. You can take a strong salary ($130K-$150K), service your debt comfortably, and still have $150K+ for growth, bonuses, or distributions. These businesses usually have real teams, systems, and some management layer.

What to Look for When Evaluating SDE

Not all SDE calculations are equally reliable. Here's what to examine.

Verify the Add-Backs

Every dollar the seller adds back to get from net income to SDE needs to be scrutinized:

Owner's salary — is it reasonable? If the owner claims a $200K salary but works 20 hours a week, you'll need to work 50+ hours or hire someone to replace the gap.

Personal expenses — are they documented? "I run $30K of personal expenses through the business" is meaningless without receipts and a clear explanation.

One-time expenses — are they truly one-time? If the seller has $25K in "one-time" legal fees every year for three years, that's a recurring cost.

Family members on payroll — do they actually do work? If the seller's spouse handles bookkeeping for $40K and you'd need to hire a bookkeeper for $35K, the real add-back is $5K, not $40K.

Look at the Trend

A single year of SDE doesn't tell you much. You want to see three years:

Growing SDE (e.g., $250K → $300K → $350K) — the business is heading in the right direction. You're buying momentum.

Flat SDE (e.g., $300K → $295K → $310K) — stable and predictable, but make sure it's not masking underlying issues like rising costs offset by price increases.

Declining SDE (e.g., $350K → $300K → $270K) — this is where you need to dig. Is it a market issue? An operational issue? Something the seller caused that you can fix? Or a structural decline?

The trend matters more than the absolute number. A business growing from $200K to $300K SDE is more valuable than one declining from $400K to $300K — even though the current SDE is identical.

Check SDE Quality

High-quality SDE comes from:

• Diversified revenue — no single customer is more than 10-15% of revenue
• Recurring or repeat business — customers come back without heavy marketing spend
• Stable margins — gross margins aren't bouncing around wildly
• Low capital requirements — the business doesn't need constant equipment investment
• Transferable relationships — customers buy from the business, not just the owner

Low-quality SDE has:

• Customer concentration — losing one client could cut SDE in half
• Owner dependence — the owner IS the product or the primary relationship
• Project-based revenue — feast or famine without visibility
• High capex needs — heavy equipment or technology that constantly needs replacement
• Unsustainable margins — below-market pricing or unsustainable cost cuts

A $300K business with high-quality SDE is worth paying a premium for. A $300K business with low-quality SDE might not be worth buying at any multiple.

Choosing Your SDE Target

The right SDE range depends on your goals, your capital, and your risk tolerance.

Under $200K SDE: You're buying a job. This can make sense if you want to be an owner-operator in a specific lifestyle business, but there's limited upside and limited margin for error. Debt service on the purchase can consume most of the earnings.

$200K–$400K SDE: The most common range for individual buyers. You can earn a solid income, service reasonable debt, and have some buffer. These businesses typically have 3-15 employees and basic systems.

$400K–$750K SDE: You're getting into territory where the business has real infrastructure — a team, processes, maybe a manager. You have meaningful income after debt service and capital to invest in growth. SBA financing gets harder above $5M in total deal value, so structure matters.

$750K+ SDE: At this level, EBITDA becomes the more common metric and institutional buyers (PE firms, family offices) enter the picture. You'll face more competition for deals but also more sophisticated businesses with proven management.

Red Flags in the SDE Presentation

Walk away — or at least dig much deeper — if you see:

• SDE that doesn't reconcile with tax returns. If the seller claims $400K SDE but their tax return shows $50K in net income and $150K in owner's salary, where's the other $200K coming from?
• Excessive add-backs relative to net income. If add-backs are 3x net income, either the business is running a lot of personal expenses (documentation problem) or the numbers are being stretched.
• No documentation for add-backs. "Trust me" isn't due diligence.
• Sudden SDE spike in the trailing year. A business that jumps from $200K to $350K in the year it goes on the market deserves extra scrutiny.
• SDE that requires the owner to work 70 hours a week. That's not discretionary — that's a grind baked into the number.

Before You Make an Offer

Once you've identified a business with attractive SDE, take these steps:

Run your own SDE calculation. Don't rely on the broker's number. Get the tax returns, P&L statements, and bank statements and calculate it yourself.

Model the debt service. Know exactly what your monthly payment will be and what that leaves for your salary and the business's needs.

Talk to the owner. Ask how they spend their time. A 25-hour-a-week owner is a different story from a 60-hour-a-week owner, even at the same SDE.

Get a Quality of Earnings report. For any business over $500K in purchase price, spend the $15K-$25K on a QoE. It's the best money you'll spend in the entire process.

Stress-test the numbers. What happens if revenue drops 15%? What if a key employee leaves? What if your largest customer churns? Make sure the SDE — and your income — can survive a bad quarter.

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Evaluating a business acquisition? Schedule a call to talk through the numbers and what they mean for your situation.