There's a number that says, fairly bluntly, whether you own a business or a job. It's called seller's discretionary earnings, usually shortened to SDE, and the name makes it sound like something you'd only care about at the end of a career. It's more useful than that. Run it on your books this year and it describes your Tuesday.
What SDE is
SDE is your profit with you added back in. It answers one question: How much money does this business throw off for a single working owner, before that owner decides how to pay themselves?
The calculation is usually built like this. Start with pre-tax net profit from your books. Then add back:
- the salary or draw you paid yourself
- personal expenses that run through the business, like a truck or phone that's partly yours
- interest on business debt
- depreciation and amortization, which are real costs on paper but aren't cash leaving this year
- one-time expenses that won't recur, like a roof repair or a lawsuit that's settled
The total is your SDE. The add-backs exist so that two businesses can be compared fairly, even when their owners pay themselves differently, finance their trucks differently, or had a bad-luck year.
A worked example
This one's a hypothetical with round numbers. Picture a plumbing shop where the owner runs one truck, a helper runs another, and the owner's spouse handles some of the phones.
The books show $40,000 of pre-tax profit. The owner paid themselves $70,000. The owner's truck and phone, partly personal, ran $9,000 through the business. Interest on equipment loans was $4,000. Depreciation was $12,000. And the shop roof needed a one-time $5,000 patch.
Add it up and SDE comes to $140,000. That looks healthy, and as a measure of what the shop produces for its owner, it is.
The numbers
| Part | Amount |
|---|---|
| Pre-tax profit | $40,000 |
| Owner's salary | $70,000 |
| Truck and phone | $9,000 |
| Depreciation | $12,000 |
| Roof patch | $5,000 |
| Interest | $4,000 |
A hypothetical shop with round numbers.
Source: Worked example, this post, 2026
The step that makes it a diagnostic
Here's where SDE gets interesting for an owner who has no plans to go anywhere. Ask what it would cost to replace everything you do.
The plumbing owner does three jobs. They're the lead plumber on the hard calls. They write every estimate. And they do the books and the ordering at night. To get those done without the owner, the shop would need to pay people for all three. The local cost of that is a number only the owner can judge, since it depends on the town and the trade. Say the owner figures it at $110,000 a year.
Subtract that from SDE and $30,000 is left. That's roughly what this business earns on its own, as a thing separate from the person running it. The other $110,000 is wages for the owner's labor, which is honest money, and it's also money that stops the day the owner stops.
The numbers
| Measure | Amount |
|---|---|
| SDE | $140,000 |
| Cost to replace the owner | $110,000 |
| What the business earns on its own | $30,000 |
The replacement cost is the owner's own estimate in this hypothetical.
Source: Worked example, this post, 2026
That split is the whole point. The $140,000 headline mixes two different things together. One part is a return on a business. The other part is a paycheck for a job. Most owners have never seen them pulled apart, and the first time can be uncomfortable.
The same reading works for any owner-run business. A solo dentist's SDE can be large, and most of it may be what it would cost to hire another dentist. A two-person bookkeeping office may find that nearly all of its SDE is the owner's own client relationships. Both are common, and both are simply a picture of how much of the business lives in the owner.
What moves the number
Raising prices lifts the headline. The part that matters grows when each of the owner's jobs gets cheaper to hand off.
In the plumbing shop, the estimates are a good place to start. If the owner writes down how they price a water heater swap, a repipe, and a drain call, someone else can produce a first draft and the owner only reviews it. The books follow the same logic. Once the ordering runs from a written reorder list instead of the owner's memory, a part-time bookkeeper can take it. Each step shrinks the replacement cost, and the share of SDE that belongs to the business grows.
That's continuity work under another name. The post asking whether your business is an asset or a job you can't quit takes the long view of the same question, and the bus test shows why customers, lenders, and managers all read the same evidence. A lender reading your books looks for something very close to SDE, which is one reason getting your records in shape before you need the bank pays off twice.
Running it yourself
Pull last year's profit and loss statement and do the add-backs in a spreadsheet. It takes an hour, maybe two if your personal and business expenses are tangled. Then list every job you do in a normal week and put a rough local wage beside each one. Subtract.
The replacement number is the soft part, and I'd be suspicious of anyone who claims precision on it. Your estimate of what it costs to replace yourself will probably be low, because owners rarely count the jobs they do without noticing. Ask someone who works with you to read your list and add what's missing. If you'd like help pulling the jobs out of your head and into something a hire could run, that's what continuity work is for.