Seller’s Discretionary Earnings (“SDE”) is an estimate of the total financial benefit an owner operator (and his/her family) gets from his/her business on an annual basis.  SDE is designed to allow business buyers to make “apples to apples” comparisons when evaluating businesses.  Most sold business “comps” report their data using SDE figures.  SDE is calculated as follows:

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• Start with the pre-tax profit from the tax return, add

• Owner compensation, salary, profit sharing, etc., plus

• Employer portion of payroll taxes (FICA, FUTA, worker’s comp., etc.) on owner’s compensation only, plus

• “Discretionary expenses” or “perks” that benefit the owner but are not essential for the business; common examples include:

  • Health and/or life insurance for one owner/ owner’s family

  • Personal use automobiles expensed to the business

  • Travel, meals and entertainment not needed for the business

  • Personal use/consumption of products/ services

  • Any personal expense paid for by the business

  • Family members on the payroll but not really working in the business, plus

• Interest expense (because business debt is a “non operating expense” and assumed to be paid off),, plus

• Depreciation and amortization (non cash expenses), plus

• Adjustments for extraordinary, non recurring expenses or revenue (e.g., expenses from a rare lawsuit or flood damage would be added back), plus

 

SDE is important because it is considered the best overall measure of the profitability of small, owner-operated businesses. 

 

EBITDA (Earnings before Interested Taxes Depreciation and Amortization) is used instead of SDE for larger businesses.