Seller Discretionary Earnings Calculator

Seller discretionary earnings is what an owner-operated business earns for the person running it, before that person takes anything out. Start at profit before tax, then add back the owner's own pay and perks, the interest on business debt, depreciation and amortisation, and any genuinely one-off cost. The result is the pot a new working owner would have to pay themselves from, service any new debt from, and reinvest from.

It is a broker's convention rather than an accounting standard, and that is the catch. No standard-setter defines it, so two advisers can produce two different SDE figures from the same accounts and both defend them. The add-backs are judgement calls, and the judgement is being made by whoever wants the number to be bigger.

A worked example, and where the number starts

The order matters: start from profit before tax, not the after-tax figure at the bottom of the accounts. Tax is one of the charges SDE strips out, because a buyer's tax position will differ from the seller's. Entering an after-tax profit understates the result by the whole tax charge.

With the default figures, pre-tax net income of 200,000, owner salary of 100,000, owner benefits of 20,000, interest expense of 10,000, depreciation and amortisation of 40,000, and one-off items of 15,000, the add-backs total 185,000 and the tool returns 385,000.00.

Where the multiple comes from

Small owner-operated businesses change hands at a multiple of that figure, commonly quoted in the range of two to four times, with the middle of the range around three. At three times, the 385,000 above corresponds to 1,155,000. At 2.5 and 3.5 times, the same earnings span 962,500 to 1,347,500. The result card shows the three-times figure so the arithmetic stays visible, and three carries no more authority than any other point in the range.

Those ranges come from what brokers quote, not from published statistics. No regulator or statistical agency collects small-business sale multiples the way central banks collect interest rates, so treat a quoted range as market folklore with a real basis rather than as data.

Multiplying an earnings figure to reach a value is a shorthand for what the International Valuation Standards Council calls the income approach, which converts future cash flow to a single current value. The shorthand holds only where the earnings being multiplied are a fair proxy for what the business will keep producing.

Which add-backs survive scrutiny

Adding back depreciation and amortisation borrows the logic of the indirect cash flow statement, where profit is adjusted for the effects of transactions of a non-cash nature. Those charges consumed no cash in the period, so they come back.

Interest comes back because the buyer chooses the capital structure, and the seller's loans usually leave with the seller. Owner pay and personal perks come back because the buyer decides what the job is worth. One-off costs come back only where there is paperwork proving they were one-off. A recurring cost relabelled as exceptional is the oldest trick in a sale memorandum.

When SDE stops being the right metric

There is a point where this stops being the right metric. It has less to do with the size of the earnings figure, which varies by market and by currency, than with who actually runs the business. While the owner is working in the business, SDE describes what the buyer inherits. Once the owner has been replaced by paid management, that management's cost is a real recurring expense, and adjusted EBITDA becomes the comparable figure.

What the result does not show

• Working capital and capital expenditure, both of which a buyer funds separately
• Tax, which SDE strips out by design and which the buyer pays at their own rate
• Whether the add-backs would survive a buyer's due diligence
• Transaction costs, escrow, earn-outs and anything else in the sale structure
• Customer concentration, lease terms, staff contracts and the other things that move a multiple more than the earnings figure does
• The valuation any specific buyer would put on the business

For educational illustration only

This calculator adds a list of figures together and multiplies the total by three. It does not know your market, your accounts, or whether an add-back is defensible. The output is an estimate for a conversation with an adviser, not a price.