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What does SDE stand for, multiple of pretax earnings?

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Answers (5)
Armin Laidre
ExitAdviser.com
Fast-track Your Business Sale
NV

Seller’s Discretionary Earnings (SDE) is a cash outflow of discretionary expenditure that is not part of normal business operations.

It can come in a number of forms. For example, you may decide to pay yourself a salary above the market rate or award Owner/Director bonuses. Equally it could be other optional perks or fringe benefits, for example company cars. The new owner may not choose to spend the money in this way. They may even hire a Manager with responsibility for trimming all discretionary business expenditure.

Aug 8, 2014
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Jul 4, 2014
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The BAF Group LLC
MD

Thanks Steve, and excellent points on your part. Philip, if the Buyer goes to the SBA, they will want to see what the Owner's Salary is, and what the Buyer's would be in relation to the SDE. To value the business, the Lender will look at the total SDE and determine whether that includes any Owners compensation. Regardless, the Lender will determine what the Buyer needs as a bare minimum of compensation, based on his/her listed expenses, then adjust that to the stated SDE. The Lender will probably want to know that the remaining SDE is at least 1.25 X the Debt Service on that business, in order for it to consider granting a loan.

Moreover, Steve's point on getting how they are defining SDE is spot on! Many Sellers and Brokers add in the entirety of the Owner's compensation, which can be highly misleading if you are trying to determine whether the business will be able to be funded by the SBA or some other, conventional Lending program. The Buyer will want any adjustments defined and justified, if the Seller/Broker does not already offer that. And regardless of even that, the Buyer should always have a CPA take his/her own, critical look at the numbers.

Aug 26, 2011
Steve Skrlac
Keystone Business Brokers Inc.
Business Brokerage Services in Ontario, Canada

To follow up on Don's great summary, some sellers and business brokers include the normalized salary for one owner/operator and also any non-business personal expenses that have been put through the business. It would be prudent to always ask how they are defining SDE and then go over it with your accountant.

Aug 25, 2011
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The BAF Group LLC
MD

Sellers Discretionary Earnings. Similar to EBITDA. It is the Net Profit declared on a Tax Return, with adjustments added back for one-time expenditures, non-cash expenses (such as Amortization and Depreciation,) and items that would be retired by the Seller that would not be recurring expenses to the Buyer, such as Interest Expense. Many Sellers and Brokers also term this Cash Flow, which is technically an erroneous label.

Aug 16, 2011

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