Seller’s discretionary earnings is a business’s pre-tax profit with the owner’s compensation, benefits, interest and one-time or discretionary costs added back — the standard earnings base for Canadian small-business deal pricing.
Deavo.ai’s definition is the clearest Canadian statement of the term: SDE “starts from a business’s pre-tax profit and adds back interest, one owner’s compensation and benefits, and discretionary or non-recurring expenses the current owner ran through the business”, producing “total cash flow available to a single owner-operator who works full time” (source). Its own worked example prices a $385,000-SDE trades business at the sector’s 3.0× median for a range of “$809K–$1.58M” (source).
SDE is also the metric Canadian small-business lending is actually sized against at the bottom of the market. Deavo’s financing data sets the minimum debt-service coverage at “≥ 1.25× on SDE” for the $200K–$1M band, before “this tool switches basis at about $1M” to EBITDA for larger deals (source). That $1M figure is an underwriting-basis switch, not a pricing rule — deavo’s own comparison article is explicit that “there is no fixed revenue or profit threshold at which a business switches from being discussed in SDE terms to EBITDA terms”; brokers exercise judgment instead, keyed to whether a functioning management team would stay on after closing.
A search-fund principal is evaluating a $700,000-revenue service business: pre-tax profit $190,000, plus owner salary $85,000, interest $6,000 and a one-time equipment casualty loss $12,000, gives SDE of $293,000. At a trades-sector median of 2.9× (deavo’s published figure), that brackets roughly $850,000. Because the deal sits under deavo’s ~$1M SDE-to-EBITDA lender underwriting switch, a CSBFP-eligible lender will size debt service coverage off this SDE figure directly, not a recast EBITDA.
See also: Free cash flow to owner · Canada Small Business Financing Programme · EBITDA.
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