What are seller’s discretionary earnings?

Seller’s Discretionary Earnings. What are they?

Seller’s Discretionary Earnings. What are they?

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seller’s discretionary earnings

sellers discretionary earningsWhat are Seller’s Discretionary Earnings (SDE)? The simple explanation is as follows: when you run a business you want to lower your taxable income, as such the owner will legally apply business expenses to their taxable income statement. However, some of these items benefit the owner and thus are discretionary. Items like: the lease of their car, the owners salary, travel and entertainment, etc.

Calculating seller’s discretionary earnings is the first and most crucial step towards setting the selling price of a business or a business valuation. Once you calculate the true owner’s discretionary earnings you apply a sales multiple and you have your price. Sometimes seller’s discretionary earnings is called business re-casted earnings as well. Under either name, it is the basis for sale pricing and of primary interest to buyers.

Following is a sample of an SDE statement. It differs from an income statement in two ways:

  • The income statement reflects the full range of normal and legal deductions, resulting in the lowest-possible bottom line and taxable profit
  • The SDE or owner’s cash flow statement presents the full earning power of your business after adding back in one-time, non-recurring purchases and discretionary expenses shown on your income statement but not essential to business operations.

Here is an example of a Seller’s Discretionary Earnings Worksheet; an income statement adjusted to reflect earning potential – called recasting or normalizing your financials.

Annual Seller’s Discretionary Earnings

Annual Revenue
Annual Cost of Sales
Annual Expenses
Annual Net Income
Adjustments for Interest, Depreciation, Tax and Amortization deductions
Add-back for Interest paid on loans
Add-back for Depreciation
Add back for Taxes paid
Add back for Amortization
EBIDTA (Earnings before Interest, Depreciation, Taxes and Amortization
Adjustments for Personal, Discretionary and One-Time
Expenses
Add-back for Owner’s Salary, Payroll Tax, Benefits
Add-back for Family Member Wages, Payroll Tax, Benefits
Add-back for Owner/Family Personal Auto Use
Add-back for Contributions/Donations
Add-back for Fair-Market Rent Adjustment
Add-back for Owner’s Insurance premiums
Add-back for Legal, Accounting, Tax services
Add-back for Owner Retirement Plan contributions
Annual Revenue
Annual Cost of Sales
Annual Expenses
Annual Net Income
Adjustments for Interest, Depreciation, Tax and
Amortization deductions
Add-back for Interest paid on loans
Add-back for Depreciation
Add back for Taxes paid
Add back for Amortization
EBIDTA (Earnings before Interest, Depreciation, Taxes & Amortization)
Adjustments for Personal, Discretionary and One-Time Expenses
Add-back for Owner’s Salary, Payroll Tax, Benefits
Add-back for Family Member Wages, Payroll Tax, Benefits
Add-back for Owner/Family Personal Auto Use
Add-back for Contributions/Donations
Add-back for Fair-Market Rent Adjustment
Add-back for Owner’s Insurance premiums
Add-back for Legal, Accounting, Tax services
Add-back for Owner Retirement Plan contributions
Add-back for Travel/Entertainment Expenses
Add-back for Subscriptions and Memberships
Add-back for extraordinary, one-time, non-recurring
expenses reflected on Income statements
Adjusted Statement of Projected Annual Seller’s Discretionary Earnings

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