If you’re a bootstrapped SaaS founder thinking about an exit, you’ve probably encountered a frustrating reality: the valuation metrics you read about in TechCrunch don’t apply to your business. Those 10x revenue multiples? They’re for venture-backed unicorns burning cash to capture market share. For profitable, owner-operated SaaS companies under $5 million in revenue, the valuation game works entirely differently. (For context on how current market conditions are reshaping SaaS exits, see our recent analysis.)
The metric that matters for your exit isn’t revenue. It’s Seller’s Discretionary Earnings, or SDE. Understanding how to calculate SDE correctly—and knowing what multiples to expect—can mean the difference between leaving hundreds of thousands of dollars on the table and maximizing your exit value.
In this comprehensive guide, we’ll walk through exactly how SDE works for SaaS businesses, what add-backs are legitimate (and which will get you laughed out of due diligence), current market multiples by business profile, and why sophisticated buyers use SDE instead of revenue multiples for smaller acquisitions.
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What Is Seller’s Discretionary Earnings?
Seller’s Discretionary Earnings represents the total financial benefit available to a single owner-operator of a business. It’s the answer to the question every individual buyer asks: “If I buy this company and run it myself, how much money will I actually make?”
Unlike EBITDA, which assumes professional management remains in place, SDE adds back the owner’s total compensation package. This makes it the preferred metric for businesses where the buyer will replace the seller as the primary operator—which describes the vast majority of sub-$5M SaaS acquisitions.
As Thomas Smale, founder of FE International (one of the largest SaaS brokerages), explains: “Most small businesses valued at under $5,000,000 are valued using a multiple of seller discretionary earnings, particularly if they are relatively slow growing and do not have a management team in place.”
The SDE Formula for SaaS Companies
The complete SDE calculation starts with your net income and adds back specific categories of expenses that either won’t exist post-acquisition or represent owner-specific benefits:
| SDE = Net Income (Pre-Tax)+ Owner’s Compensation (salary, benefits, health insurance, retirement contributions, payroll taxes)+ Interest Expense+ Depreciation & Amortization+ Non-Recurring Expenses (one-time legal fees, platform migrations, settlements)+ Discretionary Expenses (personal vehicle, travel, above-market family salaries) |
The Most Common SDE Calculation Mistake
Before diving into add-backs, there’s a critical accounting issue that trips up most SaaS founders: using cash-basis accounting instead of accrual.
Joe Valley, author of The EXITpreneur’s Playbook and partner at Quiet Light Brokerage, identifies this as the single biggest seller mistake: “The biggest mistake that sellers make is they don’t properly calculate seller’s discretionary earnings… when somebody lists their rapidly growing e-commerce business using cash accounting, that’s going to depress the age out of discretionary earnings.”
For SaaS businesses with annual prepayments, cash-basis accounting dramatically understates your true earnings. If a customer pays $12,000 upfront for an annual subscription, cash accounting shows $12,000 in revenue that month and $0 for the next eleven months. Accrual accounting recognizes $1,000 per month—reflecting the actual economics of your business.
Always calculate SDE using accrual-basis financials. If you’ve been running on cash basis, convert before calculating your valuation.
Legitimate vs. Questionable Add-Backs
Not every expense can be added back to SDE. Buyers and their advisors will scrutinize your add-backs during due diligence. Here’s how to think about what’s legitimate:
Legitimate Add-Backs for SaaS
- Owner’s total compensation above replacement cost: If you pay yourself $250K but the role could be filled for $120K, add back the $130K difference
- One-time development projects: Platform rebuilds, tech stack migrations, or major feature buildouts that won’t recur
- Non-recurring professional fees: One-time legal costs, settlement payments, or consulting for specific projects
- Personal expenses through the business: Vehicle costs, personal travel, meals, and entertainment run through the company
- Family member salary adjustments: If you pay a family member $80K for a role worth $40K, add back the $40K premium
Expenses You Cannot Add Back
- Ongoing hosting and infrastructure: AWS, Azure, or GCP costs are core operating expenses
- Regular feature development: Maintenance and incremental improvements are expected costs of running SaaS
- Customer support at market rates: Support staff earning fair wages remain post-acquisition
- Recurring marketing spend: Ongoing CAC is a permanent business expense
- Required SaaS tools: CRM, analytics, monitoring—these continue under new ownership
The test for any add-back: Would a reasonable buyer agree this expense disappears or significantly decreases after acquisition? If you can’t defend it with a straight face, leave it out.
Current SDE Multiples for Small SaaS (2024-2025)
Once you’ve calculated your SDE, the next question is: what multiple applies? The answer depends on your business profile. Based on current market data from brokerages including FE International, Quiet Light, and Acquire.com:
| Business Profile | Multiple | Characteristics |
|---|---|---|
| Underperformers | 2.0x – 2.5x | High churn (>8%), declining or flat revenue, significant technical debt |
| Below Average | 2.5x – 3.0x | Moderate churn (5-8%), flat growth, some concentration risk |
| Solid Performers | 3.0x – 4.0x | Healthy churn (<5%), 10-20% growth, diversified customer base |
| Above Average | 4.0x – 5.0x | Low churn (<3%), 20-40% growth, strong retention metrics |
| Top Performers | 5.0x – 6.0x+ | Very low churn, high growth, minimal founder dependency, strong moat |
Mark Daoust of Quiet Light Brokerage confirms these ranges: “SaaS businesses in the last 12 months—good ones that are trending well—you’re in the four to five time range.” (For current market benchmarks, see our 2024 SaaS M&A Review.)
Why Small SaaS Companies Use SDE Instead of Revenue Multiples
If you’ve followed SaaS valuations in the press, you’ve seen headlines about companies trading at 8x, 10x, or even 15x revenue. So why do smaller SaaS businesses get valued on earnings instead? Five fundamental reasons:
1. Different Buyer Profiles
Large SaaS acquisitions attract strategic buyers and growth-focused PE firms playing for 10x outcomes. Sub-$5M SaaS attracts a completely different buyer pool: individual entrepreneurs looking to buy themselves a job, search fund operators, small family offices, and SBA loan buyers. These buyers ask one question: “What can I take home annually?” That’s SDE.
2. Profitability Already Exists
Revenue multiples emerged in venture-backed SaaS because those companies deliberately operate at a loss, reinvesting everything into growth. The premise: “Don’t worry about today’s losses—look at future profits at scale.” Bootstrapped sub-$5M SaaS companies are already profitable. The owner takes a salary, distributions, and often runs personal expenses through the business. SDE captures that full economic benefit rather than ignoring it. (This dynamic is explored in depth in our analysis of the decline of exits and VC returns.)
3. Owner Economics Dominate the P&L
In a $2M revenue SaaS with 10 employees, founder compensation might run $150,000-$250,000—representing 10-15% of total revenue. Add benefits, personal expenses, and potentially above-market family salaries, and owner-related items can reach 20-30% of revenue. Revenue multiples completely ignore this. SDE normalizes for it.
4. Acquisition Financing Requires Cash Flow
The majority of sub-$5M acquisitions involve SBA loans, which require debt service coverage ratios (typically 1.25x) and proof the business can service the loan while paying the buyer. Lenders underwrite to SDE, not revenue. A $1M revenue company with $50K SDE won’t qualify for the same financing as a $500K revenue company with $200K SDE.
5. No Growth Premium Justified
Revenue multiples only make sense when you’re paying for massive future profit expansion—companies growing 50-100%+ annually that will eventually achieve 20-30% EBITDA margins at scale. A bootstrapped SaaS growing 10-15% annually with $300K in SDE doesn’t warrant that premium. Buyers apply a cash-flow multiple because “what you see is what you get.” (Understanding customer churn dynamics is critical here—it’s often the single biggest factor in multiple determination.)
The Math That Proves It
Consider a $1.5M revenue SaaS company with $350K in SDE:
- Revenue multiple (3.0x): $1.5M × 3.0 = $4.5M valuation
- SDE multiple (4.0x): $350K × 4.0 = $1.4M valuation
The revenue multiple implies the buyer is paying for massive future profit expansion. If the business grows 12% annually with a solo founder, that expansion isn’t coming. The SDE multiple reflects reality: you’re buying a cash-flow stream, not a growth story.
When Do SaaS Companies Graduate from SDE to Revenue Multiples?
The transition from SDE to revenue-based valuation happens gradually as companies scale. For detailed enterprise value benchmarks at early stages, see our report on enterprise value of pre-seed and seed stage SaaS acquisitions in 2025.
- Under $1M revenue: SDE is standard. Owner-operator dynamics dominate.
- $1M-$5M revenue: SDE or EBITDA depending on whether management team is in place and growth trajectory.
- $5M-$10M revenue: EBITDA becomes standard as professional management handles day-to-day.
- Above $10M revenue: Revenue multiples apply for growth-stage companies with institutional buyer interest.
Andrew Gazdecki, founder of Acquire.com, summarizes it well: “Startups that sell based on an SDE multiple are typically owner-operated businesses with $100k-$1M+ in profit. Many bootstrapped businesses benefit from valuing via SDE because you take the expenses a buyer will deal with post-acquisition and add them back to the net profit.”
Calculate Your SaaS Valuation
Understanding SDE is the foundation of realistic exit planning for bootstrapped SaaS founders. The companies that achieve premium multiples share common characteristics: low churn, consistent growth, diversified revenue, and minimal founder dependency. By calculating your SDE accurately and benchmarking against current market multiples, you’ll have a clear picture of where you stand—and what levers to pull to maximize value before an exit. (For a complete strategic framework, see our guide on how early-stage SaaS CEOs can exit via acquisition.)
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The bottom line: Revenue multiples represent a bet on future profitability at scale. SDE multiples price current cash flow. For bootstrapped, owner-operated SaaS under $5M, buyers aren’t making a growth bet—they’re buying an income stream. Price your business accordingly.
Related Reading
- Should Your SaaS Startup Have a ‘Plan B’ Exit Strategy?
- The SaaS Exit Crisis: A Survival Guide for CEOs Navigating the AI Era in 2025
- How Early-Stage SaaS CEOs Can Exit via Acquisition: A Data-Driven Strategy
- Software Equity Group 2024 SaaS M&A Review
Data Sources
- Software Equity Group (SEG) — Public SaaS index and M&A transaction data
- SaaS Capital — Private SaaS valuation benchmarks
- Aventis Advisors — SaaS M&A advisory and market analysis
- FE International — SaaS brokerage transaction data
- Quiet Light Brokerage — SDE methodology and small business valuations
- Acquire.com — Startup acquisition marketplace
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About DevelopmentCorporate LLCDevelopmentCorporate provides M&A advisory and strategic consulting for early-stage SaaS companies. With 30+ years of enterprise software experience including executive roles leading $300M+ in acquisitions, we help pre-seed and seed-stage CEOs navigate competitive intelligence, valuation strategy, and exit planning. Learn more about our strategic acquisition advisory services.
