1. What is Seller's Discretionary Earnings?

Seller's Discretionary Earnings (SDE) measures the normalized, operating profitability of small to mid-sized businesses. It represents the total financial benefit that a full-time owner-operator would derive from the business.

2. How Does the Calculator Work?

The calculator uses the SDE formula:

Where:

• \( PTI \) — Pre-Tax Income: The bottom-line profit of the business after deducting all operating expenses, taxes, and interest
• \( OS \) — Owner's Salary: The compensation paid to the owners for their role in the business
• \( NIE \) — Net Interest Expenses: Represents the interest paid on loans or other forms of debt
• \( D\&A \) — Depreciation and Amortization: Accounting methods used to allocate the cost of tangible and intangible assets over their useful lives
• \( DE \) — Discretionary Expenses: Non-essential expenses that are not directly tied to the day-to-day operations of a business
• \( NRE \) — Non Recurring Expenses: One-time or irregular expenses that are not expected to occur in the future or are not directly related to the core operations of the business

Explanation: The SDE formula normalizes a business's earnings by adding back expenses that are discretionary, non-recurring, or specific to the current owner's financial decisions.

3. Importance of SDE Calculation

Details: SDE is crucial for business valuation, particularly for small to medium-sized businesses. It provides potential buyers with a clearer picture of the business's true earning potential and helps determine an appropriate purchase price.

4. Using the Calculator

Tips: Enter all financial values in dollars. Ensure accurate input of all components including pre-tax income, owner's salary, interest expenses, depreciation, discretionary expenses, and non-recurring expenses for an accurate SDE calculation.

5. Frequently Asked Questions (FAQ)

Q1: Why is SDE important for business valuation?
A: SDE provides a more accurate representation of a business's true profitability by normalizing expenses that may vary between owners or be one-time in nature.

Q2: How does SDE differ from EBITDA?
A: While both measure profitability, SDE includes owner's compensation and discretionary expenses, making it more suitable for small businesses where owner involvement is significant.

Q3: What types of expenses are considered discretionary?
A: Discretionary expenses include non-essential business expenses, personal expenses run through the business, excessive owner benefits, and other expenses that a new owner might eliminate.

Q4: How often should SDE be calculated?
A: SDE should be calculated annually for business valuation purposes, and more frequently if considering selling the business or seeking investment.

Q5: Can SDE be negative?
A: Yes, if the sum of expenses and deductions exceeds the business's income, SDE can be negative, indicating the business is not currently profitable.