Farag & Co.

Owner tools

Work out your seller’s discretionary earnings.

SDE is the earnings figure most buyers of owner-run businesses start from. Enter numbers from your profit and loss statement and see how each add-back builds the total.

01 From your books

Use one full year, ideally the last completed tax year. Round figures are fine.

Total sales for the year. Used only to show SDE as a share of revenue.

The bottom line of your profit and loss statement for the year, after any income taxes. Mark it as a loss if the year lost money.

Many LLCs and S corporations pay no income tax at the business level. If that is you, leave this at zero.

02 Add-backs

Expenses on your books that a new owner would not have, or that are not cash costs of running the business.

Everything the business pays one working owner.

What counts?
  • Salary, wages, draws or guaranteed payments
  • Payroll taxes the business pays on that pay
  • Health insurance and retirement contributions for the owner
  • One owner only. Pay for a second owner or a relative who works in the business usually stays as a cost, because a buyer would have to replace that work.

Interest on business debt. A new owner will finance the business their own way.

What counts?
  • Interest on bank loans, SBA loans and lines of credit
  • Interest on equipment or vehicle financing
  • Loan principal is not an expense and does not belong here

Non-cash charges that spread the cost of assets over several years.

What counts?
  • Depreciation on equipment, vehicles, furniture and buildings
  • Amortization of intangible assets, goodwill and loan costs
  • Accelerated or bonus depreciation taken on the tax return

Costs that will not come back under a new owner, and that you can document.

What counts?
  • Legal fees for a lawsuit that has been settled
  • Repairs after an uninsured storm, fire or flood
  • Moving costs for a relocation that is finished
  • Routine repairs, or costs that return every few years, do not count

Owner spending recorded as a business expense that a buyer would not have.

What counts?
  • A personal vehicle, with its fuel and insurance
  • Personal travel, meals and entertainment
  • Family phone plans or club memberships
  • Wages paid to relatives who do not work in the business
  • Charitable donations made through the business

Other documented add-backs

Up to 3 items you can support with receipts or statements.

03 Deductions

Income that inflated the year and will not happen again.

Income that will not repeat. It comes off the total so SDE reflects a normal year.

What counts?
  • Insurance settlements or legal awards
  • A gain on the sale of equipment or property
  • Pandemic relief such as PPP loan forgiveness or the Employee Retention Credit
  • A single large order or contract you do not expect again

Buyers check the add-backs

A buyer and their accountant will compare every add-back with tax returns, bank statements and receipts. Add-backs you cannot document are usually not accepted.

One year is a starting point

Most buyers look at SDE for the last three years and the current year to date. Running the numbers for each year shows whether earnings are steady.

General guidance only

This calculator is general guidance, not financial, tax or legal advice. Your accountant can confirm the right figures for your business.

The short version

SDE and EBITDA, side by side

Seller’s discretionary earnings is the total financial benefit one full-time owner takes from the business in a year. It starts with pre-tax profit, then adds back the owner’s own compensation, interest, depreciation and amortization, and costs a new owner would not carry.

EBITDA starts from the same profit but keeps owner compensation as a cost, because a larger company pays a manager to do that job. Buyers of smaller, owner-run businesses usually work from SDE. Larger businesses with a management team in place are more often measured on EBITDA.

Pulling your records together? The sale document checklist lists what buyers usually ask to see.