How do you calculate SDE for a founder-run business?
The short answer
Seller's discretionary earnings is trailing twelve-month net profit plus the owner's own pay, plus one-off and personal costs the next owner will not inherit. Start with twelve months of real revenue, subtract only the costs the business genuinely needs, then add back what belongs to you rather than to the business.
What is SDE?
Seller's discretionary earnings is the total annual cash a business produces for one full-time owner-operator: net profit, plus that owner's own pay, plus the one-off and personal costs that do not follow the business to its next owner. It is the profit figure every multiple in a small transfer is applied to. Get it wrong and the error is multiplied by three.
SDE assumes one owner. If the business genuinely needs two full-time people to run, only one salary comes back and the second stays in the cost base as a permanent expense.
What is the method?
Work through it in this order, using twelve full months of actual data.
- Take trailing twelve-month revenue straight from your payment processor, net of refunds and chargebacks.
- Subtract every cost the business needs to keep operating: hosting, tooling, processing fees, contractors who do work the next owner will still need done, advertising you intend to keep running.
- Subtract nothing hypothetical. If you pay for it today and the business still needs it tomorrow, it stays.
- Add back your own pay, in whatever form you took it.
- Add back one-off costs and genuinely personal spending that ran through the business.
- Write down the result and list every add-back with the receipt or statement line behind it.
Step six is the one founders skip and buyers care about most. An add-back with evidence attached survives diligence. An add-back you explain verbally usually does not.
Which add-backs do buyers accept?
Buyers accept anything that will not recur for the new owner, and refuse anything the business still depends on. The test is whether the cost disappears when you do, however personal it feels while you are paying it.
| Usually accepted | Usually refused |
|---|---|
| Your own salary or drawings | A contractor who still does the support |
| One-off legal or trademark filings | Ongoing accountancy and filing fees |
| A laptop or equipment purchase | Design and development tools the product uses |
| A rebrand or one-time redesign | Hosting, domains, monitoring |
| Conference travel for your own interest | Advertising the acquisition depends on |
| Accountant's setup fee for the company | Anything you plan to cut but have not cut yet |
That last row is where most disputes happen. "We could run this on a cheaper plan" is a plan, not an add-back. Buyers price what the business did, not what it could have done with different decisions.
What does a real calculation look like?
Take a micro-SaaS that billed $72,000 across the trailing twelve months, net of refunds. Its costs over the same period were hosting at $4,800, tooling and email at $2,400, a part-time support contractor at $9,600, payment processing at $2,160, and paid acquisition at $12,000. The founder paid themselves $18,000. One-off costs were a $1,200 trademark filing and a $2,000 laptop.
| Line | Amount |
|---|---|
| Trailing twelve-month revenue | $72,000 |
| Operating costs | $30,960 |
| Founder pay | $18,000 |
| Net profit as filed | $23,040 |
| Add back founder pay | $18,000 |
| Add back trademark filing | $1,200 |
| Add back laptop | $2,000 |
| SDE | $44,240 |
At the market convention of 3× trailing annual profit for micro-SaaS, that SDE prices the business near $133,000. The filed net profit of $23,040 would have suggested $69,000. The business is identical in both cases, and only one of the two numbers describes what a new owner would actually receive.
Note what did not get added back. The support contractor stayed in the cost base, because the work still needs doing. The $12,000 of paid acquisition stayed too, because the revenue depends on it continuing.
Where do founders usually get it wrong?
The common error is adding back a cost the business still needs, and the second is counting revenue that has not settled. Both inflate SDE in ways a buyer finds within an hour of reading a Stripe export. When an add-back gets struck out, the reduction is multiplied by whatever multiple applies, so a $6,000 optimistic add-back costs roughly $18,000 of price at 3×.
Two smaller mistakes are worth naming. Using a best-month run rate instead of twelve trailing months produces a number the data will not support. Adding back a second person's salary when the business genuinely needs two people does the same.
How far back should the twelve months go?
Use the twelve months immediately behind you, ending at the most recent complete month. A stale SDE built on last year's figures invites a buyer to ask what happened in the months you left out. If the trailing year includes a bad quarter, include it and explain it.
A business with under six months of trading has no usable SDE and cannot be valued on a clean multiple. There is no trailing twelve months to calculate against, and annualising a short run produces a figure buyers discount heavily. Wait until six to twelve months of consistent data exist, or price on asset value at a discount instead.
Why does this matter more than the multiple?
SDE is the base the multiple lands on, so an hour spent documenting a defensible add-back usually beats an hour spent arguing about whether you deserve 3× or 3.5×. Prepare the calculation before you list, with each line traceable to a statement. Buyers move faster on figures they can check for themselves, and the ones who move fast are the ones worth having.
Related: sde, add-backs, how-much-is-my-saas-business-worth
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