SDE (Seller’s Discretionary Earnings)

Amazon & D2C glossary · Harpy Media

SDE (Seller’s Discretionary Earnings) is the valuation measure used for small and medium businesses: net income with the owner’s compensation, plus discretionary, non-recurring, and non-operating expenses added back. It estimates what the business earns for a single owner-operator, and it is the figure buyers and brokers work from.

What is SDE?

SDE (Seller’s Discretionary Earnings) is the valuation measure used for small and medium businesses: net income with the owner’s compensation, plus discretionary, non-recurring, and non-operating expenses added back. It estimates what the business earns for a single owner-operator, and it is the figure buyers and brokers work from.

Its importance is concentrated at exit. Marketplaces for brands price on multiples of earnings, and the earnings number they use is this one. Which means the way your accounts are kept has a direct cash consequence, years before any sale.

How the add-backs work

The logic is that a small business’s reported profit understates its earning power, because it contains items a buyer would not inherit. The owner’s salary comes back, because a buyer replaces it with their own effort or a hire. Personal expenses run through the company come back. One-off costs — a legal matter, a relocation, a write-off — come back. Non-operating items such as interest or unrelated income come back.

What remains is the cash the business produces for whoever operates it. The calculation is straightforward; the difficulty is evidential. Every add-back needs documentation, and the difference between a well-kept set of books and a shoebox is often a full multiple on the sale price.

Why the bookkeeping is the valuation

Buyers discount uncertainty. Where revenue is cleanly tracked, expenses are categorised, and add-backs are matched by evidence, the earnings figure can be defended — and a defensible figure supports a higher multiple. Where the accounts are mixed up, the buyer applies their own conservative assumptions and the valuation falls accordingly.

So the practical work is unglamorous: separate business and personal spending, record one-off costs distinctly, keep the owner’s compensation visible as its own line, and maintain records for the add-backs as they happen rather than reconstructing them in a data room. Brands that keep clean books get paid for the tidiness.

In practice

A brand owner keeps business and personal spending separate from the first year, records one-off legal and relocation costs distinctly, and has the owner’s compensation as a visible line in the accounts. At exit, the add-backs are supported by evidence rather than assertion, the earnings figure survives diligence without being re-cut downward, and the multiple holds.

How Harpy Media helps

Exit readiness is part of our brand work: accounts maintained so earnings can be evidenced, add-backs documented as they occur, and the business prepared for diligence long before a buyer appears.

SDE FAQ

What is SDE?

Seller’s Discretionary Earnings — a small-business earnings measure that adds the owner’s compensation and discretionary, non-recurring, and non-operating expenses back to net income to show the cash the business generates for an owner-operator.

Why does it matter for Amazon businesses?

Because brand acquisitions are priced as multiples of earnings, and SDE is the earnings figure used. The cleaner and better-evidenced your accounts, the stronger the number and the higher the multiple.

What counts as a discretionary expense?

Anything the owner chose to spend that a buyer would not have to: personal costs run through the business, discretionary travel, donations, and discretionary professional fees — each needing evidence to be accepted.