Seller’s Discretionary Earnings

What does your business really earn for its owner?

Buyers don’t price a small business on the net profit line of your tax return. They price it on SDE: your profit with the owner’s pay, perks, and one-time costs added back. Fill in the worksheet and the ledger on the right rebuilds your number the way a buyer’s lender will.

SDE = pre-tax net profit + one owner’s pay & benefits + D&A + interest + personal & one-time expenses ± rent adjustment
Example numbers filled in. Replace them with your own.
01Starting point

Total sales for the year. Used only to show your SDE margin.

$

Bottom line before income tax, from your tax return (Schedule C, 1065, 1120-S, or 1120). A loss is fine; enter it as a negative number.

$
02Owner pay and benefits

Owner draws and distributions aren’t expenses. They’re paid out of net income, so they’re already in your net profit and don’t get added back.

The W-2 wage or guaranteed payment the business deducted as an expense. Add back ONE owner only, even if there are several.

$

The employer’s share of FICA and Medicare on the salary above.

$

Health, dental, and life insurance, plus retirement contributions, that the business paid for that same owner.

$

If more than one owner works in the business and all are leaving, a buyer has to hire people to do the other owners’ jobs. Enter what the other owners are paid minus what those hires would cost. Paid more than replacement: positive. Paid less, or not paid at all: negative.

$
03Non-cash and financing

Accounting charges that reduce profit but don’t use cash this year.

$

Interest on business loans. The buyer brings their own financing. Principal payments are not an add-back.

$
04Personal and one-time costs

Personal use of a vehicle or phone, personal travel and meals, owner-directed donations. Keep the receipts.

$

Family who don’t work in the business: the full amount. Family paid above market: the difference. Family paid below market: the difference as a negative number.

$

A lawsuit, storm damage, a one-off project. If it shows up in two of the last three years, it’s a normal cost, not an add-back.

$

If you own the building: above-market rent is a positive number. Below-market or free rent is a negative number, because a buyer will pay full rent.

$
05Cash the business needs to keep running

This doesn’t change your SDE. It lowers what a buyer can afford to pay, because the bank subtracts it before sizing the loan.

What you spend in a normal year to replace or repair vehicles, machines, and computers just to keep running. Not growth spending. Use a three-year average if it’s lumpy.

$

What moves the price

  • Owner dependence. If customers, key relationships, or daily decisions run through you, buyers pay less.
  • Customer concentration. One customer over about 15% of sales is a risk a buyer will price in.
  • Trend. Three years of rising revenue and SDE help. A strong year after two weak ones doesn’t.
  • Recurring revenue. Contracts and repeat customers are worth more than one-off jobs.
  • Clean books. Every add-back you can’t document gets cut in due diligence, and each dollar cut costs you 2 to 4 dollars of price.

Want to see how your business scores on these? Take the free 15-minute assessment →

Before you trust this number

Lenders and buyers work from your tax returns, usually averaging the last two or three years. Run this for each year, not just your best one.

Only one owner’s pay is added back. If several owners work in the business and all are leaving, the buyer has to pay to replace the rest of the ownership team, so that cost comes out of SDE.

Above about $500,000 of earnings, buyers usually price on adjusted EBITDA instead of SDE, which treats the owner as a paid manager.

Would you like a complimentary consultation with Ed?

Fill this out and he’ll call you within one business day. Ed Mysogland has spent 34 years in the business sale industry. He’ll tell you which add-backs a buyer’s lender will accept and which ones won’t hold up.

Your SDE and the price your earnings support are sent with the form, so you don’t have to retype them.

Prefer email?
ed@edmysogland.com

Author of Done Deal: Exit Without Regret

Ed uses this only to contact you. Privacy Policy

Estimate only. This calculator follows the standard pre-tax SDE method and is not an appraisal, a guarantee of price, or tax, legal, or financial advice. Your numbers stay in your browser and are not saved or sent anywhere unless you send them to Ed with the consultation form.