Seller’s discretionary earnings (SDE)

SDE is the standard earnings measure for owner-operated Canadian businesses, and it is the number most main-street asking prices are built on. It exists because net profit understates what a business is actually worth to a buyer who will run it themselves: the current owner may pay themselves above or below market, run a vehicle through the business, or expense travel that a new owner would not repeat.

What gets added back

• One owner’s salary, bonus and management fees — a buyer who works in the business replaces this with their own
• Personal expenses run through the business: vehicles, phones, travel, memberships
• Interest, because a buyer will bring their own financing structure
• Depreciation and amortization, which are accounting entries rather than cash
• Genuinely one-time costs — a lawsuit settled, a flood, a rebranding that will not recur

Where SDE stops working

SDE assumes one working owner. A business large enough to need a full management team is normally measured on EBITDA instead, because a buyer cannot simply absorb several salaries by showing up. The rough dividing line quoted by Canadian brokers sits somewhere around $1 million of earnings, but the real test is whether one person could plausibly run it.