What Is SDE (Seller’s Discretionary Earnings)? | Agency M&A Definition
Seller’s Discretionary Earnings is a profitability metric that adds the owner’s total compensation — salary, benefits, perks, and personal expenses run through the business — back into net income along with interest, taxes, depreciation, and amortization. SDE represents the total financial benefit available to a single owner-operator and is the preferred valuation metric for smaller, owner-run agencies.
SDE (Seller’s Discretionary Earnings) in Agency M&A
SDE is the go-to metric for valuing marketing agencies under roughly $1.5M in revenue where the owner is deeply embedded in operations. In these smaller shops, the owner often wears multiple hats — running client strategy, managing a small team, handling new business development — and their compensation structure reflects that. They might take a $150K salary, run a $12K car lease through the business, pay for a home office, and cover personal travel that blends with client visits.
Buyers evaluating a creative agency at this scale understand they are essentially purchasing the owner’s job plus whatever systems and client relationships exist independently. SDE captures the true economic output by asking: if a new owner stepped in tomorrow and replaced all of these personal expenses with their own compensation preferences, what would the business actually throw off? This makes SDE more honest than EBITDA for owner-operated agencies, where the line between personal and business expenses is blurry. As agencies grow past $2M in revenue and install professional management layers, buyers typically shift to EBITDA as the primary metric.
How SDE (Seller’s Discretionary Earnings) Affects Agency Valuation
SDE-based valuations typically produce multiples in the 2-4x range for marketing agencies, lower than EBITDA multiples because the buyer is also acquiring the obligation to replace the owner’s labor. A high SDE relative to revenue signals an efficiently run agency, but buyers will discount the figure if the owner’s role would require hiring two or more people to replace. The gap between SDE and EBITDA reveals how much the owner is extracting — a large gap suggests heavy owner dependence, which increases transition risk and can compress the multiple by 0.5-1x. Buyers also examine whether discretionary add-backs are genuinely discretionary or if cutting them would harm the business.
Example
An owner-operated social media agency reports $180K in net income on $900K revenue. The owner pays herself a $130K salary, takes $18K in health insurance benefits, expenses $9K in personal travel, and runs a $7K phone and internet package through the business. SDE equals $180K net income plus $130K salary plus $18K benefits plus $9K travel plus $7K personal expenses, totaling $344K. At a 3x SDE multiple, the agency is valued at $1.03M. A buyer estimates they would need to hire a general manager at $95K to replace the owner’s operational role, effectively reducing the post-acquisition earnings to $249K.
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