Seller's Discretionary Earnings (SDE) is the most widely used valuation metric for owner-operated small businesses in Canada. It starts with net income from the financial statements and adds back: the owner's salary and personal benefits (car, phone, health insurance), one-time non-recurring expenses, non-cash charges such as amortization and depreciation, and interest on business debt. The result is the true pre-tax, pre-debt cash flow the business generates for a single full-time owner-operator. SDE is the foundation for applying an earnings multiple to arrive at a business's fair market value. Buyers use SDE to compare businesses of different sizes and ownership structures on an apples-to-apples basis. It only applies when the owner is actively working in the business. For companies large enough to support a hired general manager without sacrificing profitability, EBITDA is typically the preferred metric. A business with $300,000 in SDE priced at a 3.0× multiple has an asking price of $900,000.
A Burnaby plumbing company reports $50,000 net income on its T2. The owner pays himself $120,000 in salary, runs a personal truck through the company at $15,000, and carries $12,000 in one-time legal fees from a resolved dispute. After adding back all three, plus $8,000 in amortization, SDE is $205,000. At a 3.5× multiple, the business is worth approximately $717,500.
Ali Sedighi uses this concept on every valuation engagement — cross-checking seller claims against third-party financial data and Canadian comparable sales before advising any buyer on price.