Discretionary Earnings
Also known as: DE · Seller's Discretionary Earnings · SDE
Discretionary earnings (DE) are pro forma EBITDA plus the owner's reported compensation, used as a valuation base for very small agencies where one owner-operator is the entire agency.
What is discretionary earnings?
Discretionary earnings, sometimes called seller's discretionary earnings (SDE), is the cash an owner-operator actually pulls out of the business — pro forma EBITDA before the owner's salary is subtracted. It exists because at very small scale, the line between 'owner compensation' and 'profit' is blurry: a sole-owner agency might pay itself $80K and run an extra $50K through perks, and what a buyer cares about is the total economic return to the owner.
DE is most useful below roughly $500K of normalized EBITDA. At that size, the buyer is often another owner-operator who will replace the seller's labor entirely. They want to know: 'How much money does this business generate for one person to live on?'
The multiple is lower than an EBITDA multiple — typically 2.0x to 3.5x DE — because the multiplicand is larger. The two methods can produce similar valuations in the right hands.
Why it matters in agency valuation
If your agency is under $500K of normalized EBITDA and you are the agency, DE is often the more honest valuation lens. A buyer paying 6x EBITDA on a $200K EBITDA business is paying for $200K of buyer cash flow. A buyer paying 2.5x DE on a $300K DE business (where you, the owner, took $100K of comp) is paying for $300K of owner-operator cash flow. The numbers can look very different but underwrite to the same outcome.
Example
Common questions
When should I use DE instead of EBITDA?
When your agency is small enough (under roughly $500K of normalized EBITDA) and you are personally responsible for most of the production or service, DE is the more accurate valuation lens. Once the agency is large enough to support a separation between 'owner' and 'operator,' EBITDA is the right method.
Related terms
EBITDA is earnings before interest, taxes, depreciation, and amortization — the cash-flow proxy buyers use as the denominator in agency valuation multiples.
Normalized EBITDA is reported EBITDA adjusted to reflect what the business would have earned at market-rate owner compensation and without one-time or owner-discretionary expenses.
An EBITDA multiple values an insurance agency at a fixed multiple of its normalized EBITDA, typically 4.5x to 12x depending on agency size, growth, and book quality.
Owner compensation is the total amount the agency principal pays themselves — base salary, bonus, benefits, and owner perks — used as a key normalization in EBITDA-based valuation.
Last reviewed: April 24, 2026
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