Hey everyone, I'm getting ready to list my business (small service company) and the broker keeps throwing around 'SDE' and 'EBITDA'. I get that SDE is seller's discretionary earnings, but how exactly do I calculate it for my valuation? What gets added back? I don't want to look clueless when I talk to buyers. Any help appreciated.
SDE
How do I calculate SDE when I sell my business valuation?
Think of SDE as what the owner takes out of the business in a year, before interest, taxes, depreciation, and amortization, plus any personal perks run through the company. So start with with net income, add back interest, taxes, D&A, then add back your salary, owner distributions, and any personal expenses like your car lease or that 'business dinner' that was really your anniversary
Above is mostly right, but careful: don't add back your entire salary if you're going to need a manager to replace you. Buyers will adjust for a market-rate manager salary. So your SDE might be higher on paper, but the buyer will subtract a reasonable replacement cost when they value it. That's why why some sellers get surprised.
Thanks. So if I pay myself $100k but a manager would cost $60k, do I add back the full $100k or just $40k? The broker sadi add back owner comp entirely, but that seems to ignore the replacement cost.
Technically you add back the full owner comp to get SDE, then the buyer mentally subtracts a market manager salary to get 'adjusted SDE' or whatever they call it. But in practice, many buyers just do the subtraction upfront and call it SDE anyway. Terminology is a mess. Welcome to selling a business.
Ha, exactly. My favorite is when sellers add back their $200k salary but the business only nets $50k. Then SDE is $250k and they think they're sitting on a goldmine. Buyer looks at it and says 'so I have to pay myself $200k to keep this runnning?' Good luck.
Don't forget one-time expenses. If you bought a new forklift last year, that's a capital expense, not an add-back. But if you had a one-time legal settlement unrelated to operations, that might be added back. Just be ready to justify every adjustment with documentation.
Also, SDE is really only used for smaller businesses (think under $5M or so). If you're bigger, buyers will focus on EBITDA. But But for a small service company, SDE is the norm. Just make sure your financials are clean and you have at least 2-3 years of tax returns to back it up
And don't forget to add back depreciation and amortization. People often skip that. Also, if you have a loan on a vehicle that's in the business name, the interest portion is added back, but the principal isn't. It's a line-by-line thing. Get your accountant to help you build a proper SDE schedule.
This is helpful. My accountant is decent but hasn't done many SDE schedules. Should I push for a third-party valuation or just trust the brker's number? The broker's estimate seemed high, which makes me suspicious.
Brokers inflate SDE to get the listing. Then buyers beat it down during due diligence. It's a dance. Get an independent valuation if you want a reality check, but be prepared to pay for it. Or just list it and see what offers come in. Depends on how fast you want to sell.
Trust but verify. Ask the broker to show you exactly how they calculated it, line by line. If they can't, that's a red flag. Also, don't let them include 'projected' growth in SDE. SDE is historical, not a forecast.
One more thing: personal health insurance, life insurance, and retirement contributions you made through the business are often added back. But again, the buyer might need to replace those benefits for themselves. It's a negotiation. Don't get too attached to a single number.