What Are Seller Discretionary Earnings (SDE)?
Seller Discretionary Earnings (SDE) is a valuation metric commonly used for smaller marketing agencies (typically under $1M in profit). SDE represents the total financial benefit a single owner-operator extracts from the business, including salary, benefits, perks, and discretionary expenses.
How to Calculate SDE
Start with net income, then add back: owner's total compensation (salary + benefits + bonuses), interest, depreciation, amortization, one-time or non-recurring expenses, and personal expenses run through the business (vehicle, travel, meals, insurance). The result shows what a new owner could expect to earn.
SDE vs. EBITDA — When to Use Which
SDE is the standard for owner-operated agencies where the founder is heavily involved in day-to-day operations and takes significant compensation. EBITDA is used for larger agencies with professional management teams where the owner's role could be replaced at market-rate salary. The dividing line is typically $1M–$2M in annual profit.
Typical SDE Multiples for Agencies
2–4x SDE for agencies under $1M in earnings, depending on growth rate, client concentration, and recurring revenue percentage.
Related terms: Adjusted EBITDA, Recurring Revenue, Earn-Out
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- What Is an Earn-Out in Agency M&A?
- What Are Seller Discretionary Earnings (SDE)?
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- What Is Adjusted EBITDA for a Marketing Agency?
- What Is Recurring Revenue and Why Does It Drive Agency Valuations?