Understanding Seller’s Discretionary Earnings (SDE)
Seller’s Discretionary Earnings (SDE) goes by other names: owner’s benefit, total owner benefit, seller’s discretionary income, etc. All these terms are designed to answer one question: What is the financial benefit of being the full time, owner operator of your business? When the costs of the business are met, what’s left over for you as the owner?
In other words, SDE is the whole ball-game. If you’re unclear why it’s important, check out this link: Increase your SDE.
In an industry defined by complexity we encourage a simple approach. However, when it comes to this term there is no short-cut. Skim everything else but take whatever time you need to make sure you understand this term and what it means for your business.
First an introduction to the concept is offered by William Bruce. He underscores the importance of SDE “recasting” in capturing the earnings lost to creative owner accounting to minimize their tax exposure.
It is NOT the profit or loss that you show Uncle Sam on your tax return. To put it delicately, almost all business owners run some expenses through the business that are not — a’hem – absolutely necessary to the operation of the business.
Next, this video explanation produced by Quiet Light Brokerage, Inc. It provides a simple definition and walks through a quick breakdown of SDE. Quiet Light Brokerage Video
This article at Sellyourbusinessfast.info offers a simple SDE worksheet for you to use to pencil in your own numbers
The simple explanation is as follows: when you run a business you want to lower your taxable income, as such the owner will legally apply business expenses to their taxable income statement. However, some of these items benefit the owner and thus are discretionary. Items like: the lease of their car, the owners salary, travel and entertainment, etc.
Or, if you prefer an online tool, here’s one offered by www.yourexitmap.com
If you still don’t understand SDE after reviewing these, you must keep trying. Don’t stop until you are comfortable you understand Seller’s Discretionary Earnings.
Why is it critical:
Your SDE will be the cashflow that your buyer can use to pay for the purchase of your business. It’s the core of understanding a simple approach to preparing your business so you can sell it when you are ready.