NIGEL GORDON
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Seller's Discretionary Earnings: What It Means When Buying a Business in Australia

Nigel Gordon·
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Seller's Discretionary Earnings (SDE) is the total financial benefit a business provides to a single working owner. It's the measure most commonly used to value small Australian businesses — those generating under $1M in annual profit — and it's the number brokers will use when they hand you a business summary for a plumbing company, landscaping outfit, or electrical contractor priced between $300K and $2M.

If you're buying a business in Australia and you don't understand SDE, you'll either overpay or walk away from a perfectly good deal because the headline figure didn't make sense to you. Neither outcome is great.

This is covered in depth in Module 4 of the Playbook, but the short version is this: SDE and EBITDA are not interchangeable. Confusing them is one of the most common mistakes first-time buyers make.

What Is Seller's Discretionary Earnings (SDE)?

Seller's Discretionary Earnings is the net profit of a business after adding back the owner's salary, personal expenses run through the business, one-off costs, depreciation, and interest payments. It represents what a new owner-operator — someone who buys the business and runs it themselves — would actually pocket from the business each year.

The formula, in plain terms, is:

  • Start with net profit (after tax is fine, though most brokers use pre-tax)
  • Add back the owner's salary or drawings
  • Add back personal expenses charged to the business (phone, car, travel)
  • Add back depreciation and amortisation
  • Add back interest payments
  • Add back genuine one-off costs (a one-time legal dispute, a major equipment repair that won't recur)
  • Deduct any normalised costs the new owner will actually need to pay

What you're left with is SDE — the total economic benefit available to a single owner who works in the business.

A landscaping business in suburban Melbourne might show $80K in net profit on its tax return. But add back a $150K owner's salary, $15K of personal car expenses, and $20K of depreciation, and the SDE is $265K. That's a very different picture.

SDE vs EBITDA: The Key Difference

SDE and EBITDA both normalise business earnings — they both add back interest, tax (sometimes), depreciation, and amortisation — but SDE also adds back the owner's salary and personal expenses. EBITDA does not.

This distinction matters because of who's assumed to be running the business:

  • SDE assumes a single working owner-operator who replaces the seller. Their compensation comes from the SDE itself.
  • EBITDA assumes a business with professional management in place — a CEO who gets paid a market salary, which stays as a cost in the P&L.

For a pest control business in Brisbane with one working owner and $350K in SDE, EBITDA might be $200K (after counting the owner's market salary as a cost). The SDE is higher because it includes what the owner pays themselves.

For larger businesses — say, a fencing contractor with $1.5M in EBITDA and a management team — EBITDA is the right measure because the new owner won't be running crews themselves. At that scale, you'd need to replace the owner with a paid manager anyway, so the owner's salary is a real cost, not an add-back.

Rule of thumb: under $1M in earnings, brokers use SDE. Above $1M, they shift to EBITDA. There's no hard rule, but this is what you'll see in practice.

For a deeper explanation of how to normalise earnings when you're doing your own analysis, read the article on EBITDA normalisation — the add-back logic applies to both.

How to Calculate SDE

Here's a worked example using a concreting business in Western Australia:

P&L as presented:

  • Revenue: $1,100,000
  • Cost of goods: $480,000
  • Gross profit: $620,000
  • Staff wages (excludes owner): $210,000
  • Owner drawings/salary: $180,000
  • Vehicle expenses (mix of personal and business): $45,000
  • Phone and utilities: $12,000
  • Insurance: $18,000
  • Depreciation: $35,000
  • Interest: $14,000
  • Accountant/admin: $22,000
  • Net profit (pre-tax): $84,000

SDE calculation:

  • Net profit: $84,000
  • Add owner drawings: $180,000
  • Add personal vehicle use (estimated 40% personal): $18,000
  • Add depreciation: $35,000
  • Add interest: $14,000
  • Add one-off costs (nil this year): $0
  • SDE: $331,000

At a 2.5x multiple, this business would be worth approximately $827,500. At 3x, it's nearly $1M. The multiple depends on industry, customer concentration, how owner-dependent the business is, and whether the revenue is recurring or project-based.

SDE Multiples for Australian Small Businesses

SDE multiples in Australia for trade and service businesses typically range from 1.5x to 3.5x. What drives the multiple up or down:

Higher multiples (2.5x to 3.5x):

  • Recurring revenue contracts (maintenance agreements, service schedules)
  • Low owner dependency — business runs without the seller
  • Diversified customer base (no single customer over 15% of revenue)
  • Licensed staff who can operate without the owner
  • Clean financials with three years of consistent earnings
  • Businesses in growth industries or underserviced regions

Lower multiples (1.5x to 2.5x):

  • Project-based revenue with no recurring contracts
  • High owner dependency — the seller IS the business
  • Customer concentration risk (one or two customers = most of the revenue)
  • Aging equipment with deferred maintenance
  • Single year of strong earnings without a track record
  • Owner unwilling to stay for a meaningful handover

A cleaning business on the Gold Coast with service contracts and employed staff will trade at a higher multiple than an identical-looking business where the owner does all the work and knows every customer personally. The numbers might look the same; the risk profile is completely different.

This is why knowing EBITDA multiples for trades businesses is useful — the logic applies to SDE multiples too, just at a smaller scale.

What Legitimately Increases SDE

Not every add-back is legitimate, and sellers (or their brokers) sometimes present SDE in a flattering light. Legitimate add-backs:

  • Owner's salary or drawings — if the seller was running the business and paying themselves, that's a real add-back. If they're suggesting you add back a salary they didn't actually pay themselves, that's not a real add-back.
  • Personal expenses clearly attributable to the owner — a car used 100% for business is not an add-back; a car used half for the owner's personal driving is a partial one.
  • Genuine one-off costs — a single year of legal fees for an unusual dispute, a one-time asset write-down, a once-in-a-decade equipment replacement.
  • Depreciation and amortisation — these are accounting entries, not cash, so they're added back in both SDE and EBITDA.
  • Interest — add this back if you're comparing business earnings on a debt-free basis.

What's not legitimate:

  • Adding back recurring costs that will continue under new ownership
  • Adding back owner wages for work the new owner will still need to do (or pay someone to do)
  • Treating multiple years of "one-off" costs as add-backs
  • Claiming personal expenses that weren't actually run through the business

I saw a deal last year where the broker's SDE calculation added back $40K for a "one-off website rebuild" — in three consecutive years. That's not a one-off. That's a cost. If the seller is presenting SDE that looks aggressive, read the article on financial red flags when buying a business before you go further.

Does SDE Include Owner Salary?

Yes. This is the defining feature of SDE: it adds back the owner's salary, drawings, or distributions in full. The logic is that when you buy the business, you become the owner — so your own compensation comes out of the SDE, not on top of it.

If a business has SDE of $300K and you pay yourself $120K to run it, your investment return on the business is $180K. That's your economic profit after compensating yourself.

This is also why SDE is always stated before the owner's personal compensation. When a broker tells you a business has "SDE of $280K", they mean $280K available to a working owner — and that working owner is you.

When Does SDE Stop Making Sense?

SDE breaks down as a valuation metric when the business is large enough to require professional management that doesn't involve the owner day-to-day. If an HVAC company turns over $5M and has a general manager, operations manager, and sales team already in place, the new owner isn't replacing the seller in a working capacity — they're an investor. EBITDA is the right measure because management costs are real and can't be added back.

The crossover point is different in every industry, but as a rough guide: once the owner's salary is under 30% of the total earnings figure, EBITDA usually tells a cleaner story. Below that threshold, SDE inflates the number in a way that doesn't reflect the business's standalone value.

For a more complete picture of how valuation works across different business sizes and types, read the full guide on how to value a small business in Australia.

Checking the SDE Figures

You should never accept a seller's SDE calculation at face value. The verification process:

Step 1: Get the tax returns. Three years minimum. BAS statements for the same period. Tax returns don't lie the way management accounts sometimes do — sellers pay less tax by showing lower profits, which actually works in your favour when checking SDE.

Step 2: Reconcile the add-backs. Go through every add-back line by line and ask for supporting documents. Owner salary — what payslips or drawings records support this? Personal vehicle — what proportion? One-off costs — which year?

Step 3: Check what's missing. Sometimes SDE calculations omit costs the new owner will have to pay. If the seller is the only licensed plumber and you'll need to hire one, that wage is a new cost that reduces your effective SDE.

Step 4: Adjust for working capital. SDE doesn't tell you about the cash the business needs to operate. A business with high SDE but terrible accounts receivable (everyone pays late) can still eat your cash. Read about how to check the financials for the full process.

The free EBITDA Normalisation Checklist covers the verification process step by step — the same logic applies whether you're checking SDE or EBITDA.

Want the full Industry Multiples Cheat Sheet? It covers SDE and EBITDA multiples by trade and service category — plumbing, electrical, HVAC, landscaping, concreting, and more — with what drives them up and down. Grab it free at /resources/industry-multiples-cheat-sheet-buying-business-australia.

FAQ

What does seller's discretionary earnings mean?

Seller's Discretionary Earnings (SDE) is the total annual economic benefit a business delivers to a single working owner, calculated by adding the owner's salary, personal expenses, depreciation, amortisation, and interest back to the net profit. It's used to value small businesses where the new owner will work in the business.

Does SDE include owner salary?

Yes. Owner salary or drawings are the primary add-back in an SDE calculation. The assumption is that as the new owner, your compensation comes from the SDE — so the seller's salary is added back to show the full earnings pool available to you.

How do you calculate discretionary earnings?

Start with net profit, then add back: owner's salary or drawings, personal expenses run through the business, depreciation, amortisation, interest, and genuine one-off costs. Deduct any costs a new owner would genuinely need to pay that the current owner avoided. The result is SDE.

What's the difference between SDE and EBITDA?

EBITDA adds back interest, tax, depreciation, and amortisation — but keeps management salary as a cost. SDE also adds back the owner's personal salary and expenses. SDE is used for small owner-operated businesses; EBITDA is used for larger businesses with professional management.

How much is a business worth using SDE?

Multiply the SDE by the relevant industry multiple, which for Australian trade and service businesses typically ranges from 1.5x to 3.5x. A pest control business with $250K SDE at a 2.5x multiple is worth $625K. The multiple depends on revenue quality, owner dependency, customer concentration, and business risk.

What is discretionary income for a business?

Discretionary income in a business context refers to earnings available after necessary costs are covered — the pool from which the owner draws their compensation and investment return. In SDE calculations, it's the total benefit the business generates for its owner before that owner's personal compensation.

If you found this useful, The Leveraged Worker newsletter covers valuation, due diligence, and deal structuring for Australian business buyers each week — practical stuff, not theory. And for the complete framework on business valuation, Module 4 of the Playbook covers EBITDA normalisation, SDE, multiples, goodwill, and working capital adjustments from first principles.