SDE stands for “Seller’s Discretionary Earnings”. The business sale price paid by buyers for companies with adjusted EBITDA or SDE under $1,000,000, is generally determined by a multiple of SDE. Although it is best to work with a professional to determine the final business sale price, an owner can estimate SDE and an appropriate multiple of 1-3 times to get an idea of the company’s value. Ultimately, the rationale behind using SDE and any adjustments made needs to be defendable to prospective buyers and may be negotiated through the sale process.
- Tax returns. Pull out your tax returns for the years you’d like to calculate SDE for, using the last three years is common. Perform the steps below for each year you select separately, each tax year will have its own SDE.
- Add it up. Generally, you can find these numbers on the first page of your tax returns:
- Find ordinary business income (pre-tax earnings)
- Add Interest Expense
- Add Depreciation Expense
- Add Amortization Expense (this may be listed in the itemized expense statement further back in the tax return)
- Add owner compensation and benefits. Do NOT normalize to align with the market.
Note: Since we are using ordinary business income from tax returns as our base number, taxes haven’t been deducted and therefore do not need to be added back.
- Unusual Expenses. Now that you’ve found SDE in Step 2, review your expenses for the period you’ve completed the calculation for. Were there one-time and non-recurring expenses? Identify any unusual expenses you don’t see year to year and add them back. For example, charitable donations, excessive travel and entertainment expenses, one-time bad debt write-offs, etc.
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