Software Growth

SDE (Seller's discretionary earnings)

SDE is the total financial benefit one owner-operator gets from a business: profit plus owner pay and one-off costs. Small SaaS often sells on it.

Seller's discretionary earnings (SDE) measures what a business earns for a single owner who works in it full time. It is the number most small, owner-run SaaS companies are valued on when they sell through brokers and marketplaces. It differs from EBITDA because it adds back the owner's whole compensation, on the assumption that the buyer will step into the owner's role. FE International puts it this way: SDE assumes the buyer will step into the owner's role.

How to calculate SDE

Example: a SaaS with $400,000 ARR reports $90,000 net income. The founder pays themselves $60,000, the company paid $10,000 in one-off legal fees for a contract dispute, and $5,000 of personal expenses ran through the business. There is no debt or depreciation. SDE = 90,000 + 60,000 + 10,000 + 5,000 = $165,000.

Valuing on an SDE multiple

At 3.5x, the example is worth 165,000 x 3.5 = $577,500. One published guide for sub-$5M SaaS, from Development Corporate, gives roughly 3.0x to 4.0x for solid businesses with low churn and moderate growth, higher for strong growth and low founder dependency, and 2.0x to 3.0x for high-churn ones. Those are one firm's ranges, not a rule. Brokers publish their own, so compare several.

SDE vs ARR multiples

The ARR multiple prices the revenue stream, which suits larger and faster-growing companies. The SDE multiple prices the owner's earnings, which suits a business where the buyer is acquiring a job and an income. FE International says the metric used depends on size, growth profile and the buyer's model. Where the two disagree, expect buyers to anchor on SDE for small deals.

Add-backs that hold up

  • Owner pay above a market replacement cost, personal expenses, genuinely one-time projects.
  • Not accepted: hosting, regular development, normal support, recurring marketing. Buyers will remove unevidenced add-backs in due diligence.

Use accrual accounting. With annual prepayments, cash accounting can understate earnings.

Sources

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