Seller’s Discretionary Earnings (“SDE”) is a common, and highly correlated, metric used in valuations of companies with enterprise values less than $3 million +/-. For companies with values above $3 million, adjusted EBITDA (Earnings Before Interest, income Taxes, Depreciation, and Amortization) becomes more common. SDE equals EBITDA plus owner’s compensation, personal expenses, and other normalizing (positive or negative) adjustments. SDE is calculated to give the prospective buyer a sense of the owner’s discretionary cash flow the Company has generated on a normalized basis. The resulting amount is the cash flow that the owner has available that period to use at their discretion to cover their own compensation, debt service, return on equity, and any capital expenditures. For valuation purposes, the inventory value is then added to the product of the calculated SDE when multiplied by an appropriate Price to SDE multiple derived from looking at comparable transactions. Be careful of rules of thumb or back of the envelope calculations, as both careful calculation of SDE and selection and calculation of the proper comparables are important for an accurate assessment.