Seller's discretionary earnings (SDE) for a funeral home

Picture the owner of a 140-call family firm. She takes the first calls at 2 a.m., embalms, meets families, directs services, and signs the payroll checks. Her tax return shows modest profit, because the business pays her salary, her truck, and her health plan. A buyer who will step into that same role wants to know what the whole package is worth. Seller’s discretionary earnings answers that question, and it is the starting point for most single-location deals in our funeral home valuation hub.

Why do funeral home buyers start with SDE instead of net income?

Because net income on a small funeral home is shaped by tax planning, not by what the business can pay its next owner. SDE strips out the owner’s choices so a buyer can see the cash the role and the firm generate together.

Most firms are small enough that SDE fits. In an October 2025 Funeral Director Daily article on small-volume firms, consultant Glenn Gould, working from NFDA’s firm count, said 30% of firms handle fewer than 100 cases a year and 68% fewer than 200. Firms that size rarely have a manager separate from the owner, and their likely buyer is a licensed director who will do the work personally.

Once a firm has salaried management and the owner could walk away for a month without the phones going unanswered, the better measure is adjusted EBITDA. The two are cousins: adjusted EBITDA is roughly SDE minus a market wage for the person running the business.

What does a funeral home’s SDE include?

It includes pre-tax profit, one owner’s total compensation, financing and non-cash charges, and documented costs that a new owner would not incur. Each line has a funeral-specific wrinkle.

The owner’s unpaid labor deserves special attention. Many owners cover every on-call night themselves, so payroll looks lean. SDE already pays that owner through the add-back, but a buyer will ask whether one person can keep doing it. If not, the new owner will hire help, and that cost belongs in the buyer’s version of SDE.

How is SDE calculated and verified?

Build it from the tax return, then prove each adjustment with a document. A number that cannot be traced to a return, a bank statement, or a payroll record will not survive diligence.

1. Start with pre-tax income from the business tax return for each of the last three years, plus the trailing twelve months from internal statements.
2. Add back one owner’s W-2 pay or guaranteed payments, the employer payroll taxes on it, and the owner’s benefits.
3. Add back interest, depreciation, and amortization.
4. List each discretionary or nonrecurring item with its invoice, check, or ledger entry.
5. Adjust related-party rent and family payroll to market levels, up or down.
6. Reconcile revenue to the call register and bank deposits so a reviewer can see the earnings are real cash.

Lenders now formalize step six. Under SBA SOP 50 10 8.1, effective October 1, 2026, an initial acquisition priced at $3 million or more requires a quality of earnings report with a cash proof covering the trailing twelve months and two fiscal years. Our guide to quality of earnings for a funeral home explains what the reviewer tests, and the add-back guide sorts accepted adjustments from rejected ones.

How do sellers, buyers, and lenders each use SDE?

All three start from the same recast but ask different questions of it. The seller wants the highest defensible figure, the buyer wants the figure that will repeat, and the lender wants to know what is left for debt.

Sellers

A seller uses SDE to set expectations and to spot weak documentation before a buyer does. Running your own recast a year early, as part of the Four-Number Funeral Home Valuation Screen, shows whether your normalized margin will support the range you hope for. The screen’s third number is exactly this margin: SDE divided by service and merchandise revenue.

Buyers

A buyer applies a multiple to SDE, but first rebuilds it around their own plans. A buyer who will not embalm will add a staff embalmer. A buyer who needs a separate funeral director in charge must pay one. For a sanity check on replacement pay, the Bureau of Labor Statistics reports May 2025 median wages of $78,790 for funeral home managers and $55,010 for morticians, undertakers, and funeral arrangers.

Lenders

A lender cares less about SDE than about what remains after the new owner is paid. A bank will typically subtract a reasonable salary for the buyer-operator, then test whether the rest covers loan payments. The SOP sets a 1.25 minimum debt-service coverage ratio for an initial acquisition and measures historical coverage on EBITDA, not SDE. See our guide to SBA loans for funeral homes for the full sizing math.

Why do SDE multiples look lower than consolidator multiples?

Because SDE still contains the owner’s wage, so the same price divided by a larger number gives a smaller multiple. Comparing an SDE multiple with an EBITDA multiple without converting first leads owners to the wrong conclusion.

The only verified public figure is an EBITDA multiple. Carriage Services told investors on its Q4 2025 earnings call that it expected 7x to 9x EBITDA on acquisitions it planned for 2026. That describes larger firms Carriage selects, measured after a manager’s salary. It is not a benchmark for SDE on a 120-call family firm, where in our experience pricing lands in the low-to-mid single digits of SDE.

What mistakes distort a funeral home’s SDE?

The common errors are adding back two owners, treating marketing as personal spending, ignoring under-market rent, and counting one strong year as normal. Each one inflates the figure a buyer will later cut.

The seller in this example is not dishonest. The spouse’s low pay and the sponsorships simply look different from the other side of the table. Fixing the recast before going to market costs far less than losing that gap in negotiation.

Timing is the other quiet distortion. If the trailing twelve months include a heavy winter or a cluster of preneed maturities, SDE for that period will run ahead of the three-year pattern. Buyers notice. Present all three years and the trailing period side by side, explain any spike in a sentence, and let the buyer see that you are not asking to be paid for an unusual season.

Run your own figures through the funeral home valuation calculator, which appears below, using the buyer’s version of SDE rather than your own.