SDE Definition?

April 24, 2025

by a searcher from University of Texas at Austin in Dallas, TX, USA

Anyone else see that brokers very very rarely add back a market rate for the owner’s replacement. I feel like I consistently add somewhere between 80-120k as a market replacement, plus some reasonable amount of maintenance Capex - this drastically eats into the broker’s stated SDE and puts me behind other offers. Anyone have feedback on this? Am I being too conservative?

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Reply by a professional
in Toronto, ON, Canada

Thanks ^redacted‌. In line with ongoing comments, we typically begin with the SDE as defined, then refine it during the due diligence phase to calculate the adjusted EBITDA (or, underlying earnings). During the QofE review, we normally adjust owner and senior management market rate compensation, trying to align with the Buyer's estimated salary, as this approach usually provides the most accurate estimate.

Reply by a searcher
from The University of Chicago in Nashville, TN, USA

Seller Discretionary Earnings (SDE) should never include the owner's replacement costs by definition, that is the difference with EBITDA. It is usually used for smaller business where the Buyer will likely be heavily involved. That is also kept in mind when you do your valuation, you will have different multiple targets for SDE and EBITDA. As an example, I often see deals that the same company would be a ~3X multiple of SDE or a ~4X multiple of Adjusted EBITDA.

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