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Discover How to Calculate Your Seller’s Discretionary Earnings (SDE)

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Discover How to Calculate Your Seller’s Discretionary Earnings (SDE)

Learn how to prepare a Seller's Discretionary Earnings (SDE) statement, also known as owner's cash flow, to determine the total financial benefit a business provides to its owner. SDE serves as the foundation for income-based valuations in small business sales. Excerpted from BizBuySell's Guide to Selling Your Business.

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Transcript

Preparing a statement of seller’s discretionary earnings (SDE). To calculate SDE, a key figure in small business sales, the year-end income statement is recast with the following adjustments.

One. Add back expenses that were deducted for interest, depreciation, taxes, and amortization, resulting in what accountants call business EBITA - earnings before interest, depreciation, taxes, and amortization.

Two. Add back expenses that benefited the owner directly, such as owner salary and benefits, insurance and auto use.

Three. Add back discretionary expenses and contributions or donations that another owner might choose not to incur.

Four. Add back nonrecurring expenses to normalize earnings by excluding unusual and one-time

transactions of the business.

Five. If SDE has differed greatly over recent years, work with your accountant to create and present what is called a weighted average.

Six. To prepare an estimate of your SDE, use the SDE calculation worksheet in the digital toolkit, working from your financial statements to fill in the shaded cells. The form automatically calculates entries to reflect your annual owner's benefit.

Your seller's discretionary earnings or SDE, which forms the basis of the income-based valuation used in pricing nearly all small and medium-sized businesses.