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Seller’s Discretionary Earnings. What are they?

sellers discretionary earningsBusiness Valuations – What is your business worth?

There are several business valuation methodologies.  Asset based approach, earnings based, even market based valuation methods.  However, for the vast majority of “main street” businesses with net earnings less than $500,000, the most used valuation method is an earnings based method using a Seller’s Discretionary Earnings calculation and an industry specific multiple of this SDE calculation.

Seller’s Discretionary Earnings Valuation Calculation

What 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. (more…)