“We create profit every year, but we re-invest it all back in the business.”
“We spend down our profit to eliminate our tax liability.”
“I had to lower my salary, so we could pursue that growth opportunity.”
- Business owners.
“I’m so tired of looking at businesses to buy that never make a profit. Business owners forget that “profit” isn’t something they spend, it’s something that they don’t spend. I’ve heard all the explanations a dozen times. I want to buy a business, but there needs to be some cash-flow in the business to pay for it”
- Business buyers.
“You Must Spend Money To Make Money”
It’s always just out of reach. Profit. Cash-flow. A higher salary. Growing a small business is a challenge, and it often requires that you, the owner, make sacrifices. That’s part of the journey, and each of the strategies described above is valid for a business at certain times – but each of the strategies also lowers a business’ Seller’s Discretionary Earnings (SDE). Pursue these strategies when they make sense but understand that you are impacting your ability to sell your business.
You Know the Question. Here’s the Answer.
Are your results desirable? That’s one of three questions you must answer about the results your business generates. For your results to be desirable you must:
- Increase your SDE
- Improve your Job
What is SDE?
SDE is called other things: owner’s benefit, owner’s cash-flow, total owner benefit, seller’s discretionary income, etc. All these terms answer one question: What is the financial benefit of being the full time, owner operator of your business? In whatever form it takes, when the costs of running the business are met, what’s left over for you as the owner?
That left-over benefit might take the shape of the owner’s salary, net profit, benefits the owner receives (car, insurance, etc.), but it also includes adding back certain expenses like interest and depreciation, or other accounting categories that don’t go directly to the cost of running the business.
We’ve provided links to more in-depth definitions of SDE here if you’d like to understand the concept better. But understanding SDE is just the start, to improve your results you need to increase your SDE.
Increasing Your SDE
Increasing your SDE is the single most effective way to improve your chance to sell your business. Nothing comes close. If you doubt that, take a minute to learn why every business owner needs to understand “my results buy my business”. Your SDE will be what your buyer uses to pay for your business.
SDE is not “theoretical”. It’s not like the evaporating “profits” described in the quotes above. It’s real, documented results that survive our best efforts as owners to reinvest in the business – and this is where we as owners get into trouble. SDE is unforgiving – it’s either there or it’s not. Throughout the business year we make 100’s of decisions – decisions that help us grow the business and solve critical problems, but also lower our SDE.
Increasing your SDE is more about changing your mindset than it is about changing your business.
To increase your SDE, you can do many things, but it requires both the “cut” and the “keep”.
We walked through a review of all the annual overhead costs in his business, and we found $10,000 of yearly expense he could cut out without impacting the business. I advised him to put $5,000 of it into marketing and $5,000 into his salary. He’s interested in selling and the increase in SDE would have helped.
Last time I talked with him he still hadn’t increased his salary. “I can’t afford it”, he told me. He was planning to spend the whole $10,000, but after he cut it he wasn’t willing to keep any of it.
Raise your prices, reduce your expenses, increase your revenue . . . there are thousands of ways to increase your SDE, which is why this step is one of the prime targets in our email program, here’s one example.
However you do it, you must do it. While there are other ways to make your results more attractive, nothing comes close to increasing your SDE.
Add “Will this increase my SDE?” to the list of questions you consider when making daily decisions.