What is SDE? How to calculate owner earnings for your Shopify store

If you ask a broker what your Shopify store is worth, the first thing they will ask for is not your revenue. It is your seller's discretionary earnings, usually shortened to SDE. Almost every online store that sells for under a few million dollars is priced as a multiple of this one number, so it is worth understanding exactly how it is calculated before anyone else calculates it for you.

What SDE actually measures

SDE is the total financial benefit the business produces for one full-time owner-operator in a year. Put simply: the profit the business makes before you pay yourself.

It exists because small businesses are run in very different ways. One owner pays themselves a salary through payroll, another takes draws, a third runs a few personal expenses through the company. Net profit on the tax return reflects those choices, so it is a poor way to compare two stores. SDE strips out the owner-specific items so that a buyer can see what the store would earn for them.

The basic calculation

Start with net profit for the last twelve months, then add back items that a new owner would not inherit:

1. Net profit (from your profit and loss statement, not your bank balance)
2. + Owner's salary or draws for one working owner
3. + Owner's payroll taxes and benefits paid by the business (for example, your health insurance)
4. + Interest on business loans, because the buyer will finance the purchase their own way
5. + Depreciation and amortisation, which are accounting entries rather than cash spent this year
6. + One-time expenses that will not recur, such as a site rebuild or a legal dispute that has been settled
7. + Personal expenses run through the business, such as a personal phone plan or a family car

Example. A store shows $92,000 net profit. The owner paid themselves $48,000, the business paid $6,000 of their health insurance, and there was a one-off $9,000 redesign. SDE is $92,000 + $48,000 + $6,000 + $9,000 = $155,000.

Use the trailing twelve months (TTM) rather than last calendar year. Buyers price what the store is doing now.

Add-backs that hold up, and ones that don't

Add-backs are where most valuation arguments happen. A buyer accepts an add-back when it is documented, clearly non-recurring or clearly personal, and not needed to keep the revenue coming in.

Add-backs buyers usually accept:

• Owner salary and owner benefits for one owner
• Interest and depreciation
• A rebrand, migration or legal fee with an invoice and a clear end date
• Personal subscriptions or travel that have nothing to do with the store, if you can show them on statements

Add-backs buyers usually reject:

• "We overspent on ads in March." Ad spend that drove revenue is a cost of that revenue. If you remove the cost, you have to remove the sales too.
• A family member's wages when that person actually packs orders or answers emails. The new owner will need to pay someone to do that work.
• Recurring "one-offs". A new photoshoot every year is a normal cost of doing business, not a one-time expense.
• Inventory write-offs that keep happening. Spoilage, dead stock and returns are part of the model.
• Undocumented items. If you can't show the receipt or statement line, assume it will be disallowed.

A useful test: would a new owner have to spend this money to keep the store doing what it does today? If the answer is yes, it is not an add-back.

What if you have a second owner or a team?

SDE assumes one working owner. If two partners both work full time in the business, only one salary is added back. The second partner's work would have to be replaced by a hire, so the market cost of that role stays in the expenses.

For larger stores, often above roughly $1M in earnings, buyers start using EBITDA instead. EBITDA assumes the business is run by paid management, so the owner's salary is replaced with a market-rate manager's salary. Most stores under $2M in revenue are still priced on SDE.

Common mistakes owners make

Using revenue instead of profit. A $1.2M revenue store at 8% margin and a $600k store at 30% margin are very different businesses. The second one produces more SDE.

Mixing cash and accrual numbers. If you bought six months of inventory in November, your cash-basis profit for the year looks low, then high the following year. Buyers will want cost of goods matched to the sales they produced. Ask your bookkeeper for accrual-basis or inventory-adjusted statements.

Forgetting app subscriptions and fees. Shopify plan, apps, payment processing, shipping software and email tools add up. They are real operating costs, and a buyer will find them in diligence.

Building the add-back list after the fact. If you know you will sell in a year or two, keep a running spreadsheet of add-backs with links to the supporting statement. It is much more convincing than a list assembled from memory.

Why SDE matters more than you think

Because the store's price is SDE multiplied by a multiple, every dollar of SDE is worth several dollars of sale price. At a 3x multiple, an extra $10,000 of genuine, recurring owner earnings adds about $30,000 to the price. The same is true in reverse: a $10,000 add-back a buyer rejects can take $30,000 off an offer.

That is why the best time to clean up your SDE is well before you list. Separate personal and business spending, stop running one-off projects through the business in the year before a sale, and keep evidence for every add-back you plan to claim.

Next step

You can get a quick view of your store's SDE and what it implies in our free estimate. It takes six numbers and shows which factors are pulling your multiple up or down. If you want to understand how the multiple itself is set, read why one Shopify store sells for 2x and another for 4x.

This article is general information, not tax, legal or financial advice. Work with your accountant on how add-backs apply to your own statements.