SDE (seller's discretionary earnings)

Net profit plus the owner's salary, plus one-off and personal expenses run through the business. It is the standard measure when small businesses change hands, because reported net profit is usually suppressed for tax reasons.

Small businesses typically sell for two to four times SDE. Knowing the multiple in your sector tells you what every extra dollar of SDE is worth on exit - often three dollars or more.

A cleaning business reports $60,000 of net profit. Add back the owner's $50,000 salary, the $8,000 truck that is also the family car and $6,000 of one-off legal fees, and SDE is $124,000. At a three times multiple that gap is $180,000 against $372,000 - the same business, the same bank statements, two prices.

Which is why add-backs are where small deals are won and lost. A buyer will challenge anything you cannot document, and should. Anything genuinely required to keep the business running is not an add-back either: if a $45,000 manager would have to be hired to replace the owner, that salary is a cost, not earnings.