What the recast is allowed to include
SDE starts with reported net income. It then adds the owner’s salary and benefits, interest that a cash buyer will not keep, depreciation and amortization, and personal or one-time charges that a buyer can prove will vanish. The proof is invoices, payroll registers, and tax returns — not a story about a boat. Add-backs that fail that test die in diligence.
A shop that shows $900,000 of SDE including $220,000 of owner salary is not a $900,000 EBITDA company. Subtract a replacement general manager before you change the label. That fork is why this glossary keeps SDE and EBITDA on separate URLs.
Why Main Street manufacturing still quotes SDE
Most U.S. plants are owner-operated. Census CBP 2023 counted 284,452 manufacturing establishments; this definition exists because the typical file still has the seller on the floor (Source: Census CBP). Buyers who live on SBA paper and owner-operator cash need a number that includes the job they are buying.
BizBuySell’s manufacturing median on the 2021–2025 sold set was 2.75x SDE (Source: BizBuySell). That multiple attaches to this earnings base. It does not attach to adjusted EBITDA on a certified $8 million plant. Valuation keeps the size bands.
| Item | Stays in SDE | Leaves before EBITDA |
|---|---|---|
| Owner W-2 and perks | Yes, added back | Replaced with market GM |
| Interest on seller-used debt | Usually added | Already below EBITDA |
| One-time flood cleanup | If documented and dated | Same test |
| Deferred spindle rebuild | Never an add-back | Still a cash chip |
When should you stop using seller discretionary earnings?
Stop when a replacement manager is already in the trailing twelve months and the likely buyer is a searcher, independent sponsor, or fund. Those rooms price adjusted EBITDA. Keep SDE when the seller still quotes, programs, or covers second shift, and the likely buyer is an individual who will take that seat. The FAQ restates the fork; this page only names the cash.
SBA change-of-ownership files still sit in a $5 million 7(a) box (Source: SBA). Many of those borrowers underwrite SDE because they are buying a job plus a plant. That does not license a seller to call SDE “bank EBITDA.”
What this definition will not do
It will not invent a local multiple. It will not treat a CIM schedule as a quality of earnings. It will not let unfunded maintenance puff the earnings base. Educational information only. A CPA recasts the tax returns; counsel writes the reps.
How to present SDE without embarrassing the file
Show the bridge from tax-return net income to SDE in one table the CPA will initial. Show the owner hours. Show who covers vacation on the constraint machine. If the seller is the estimator and the closer, say so. Buyers who live on SDE are buying that job. Hiding it does not raise the multiple. It delays the walk.
Do not present three years of SDE that silently change the add-back policy each year. Consistency is part of the definition. A 2023 recast that left the lodge in and a 2025 recast that pulled it out needs a sentence, not a shrug.
Valuation still owns size bands. This page owns the cash label. Jason Taken is a business broker. After the noun is straight, sell a manufacturing business is the process map and a confidential intro call is the conversion path. The rest of the glossary keeps neighboring nouns from collapsing into this one.
Where SDE shows up in a real process
Individual buyers and many 7(a) credit memos still ask for SDE because they are underwriting a job plus a plant. Searchers who say they “can look at SDE” will still subtract a manager before they submit. Write both numbers if the seller is still on the floor. Do not make the buyer do the subtraction in their head and then accuse them of lowballing.
A trailing twelve that includes a one-time dump of obsolete inventory is not a clean SDE year. Pull the dump out or leave it in and say so. Silence is how QoE later looks clever at your expense. The owner comparison on SDE versus EBITDA is the long treatment. This extra section only keeps the cash label usable in a week-one memo.