I keep seeing SDE thrown around in valuation discussions, but I want to understand how it actually affects the cash I walk away with. For those who have sold, how did your SDE get used in the negotiation? Did buyers try to normalize it down? Did it really dictate the multiple? Or is it more of a starting point that gets picked apart during due diligence?
Business Sale
The real impact of SDE on your final exit paycheck
SDE is thhe number buyers anchor to, but they will absolutely try to argue it down. In my sale, the buyer's team went through every add-back line by line. Some held up, some didn't. The final number was lower than my initial SDE, but thee multiple stayed roughly the same. So it affected the total price more than the multiple itself.
It's a starting point. Nothing more.
The biggest impact I saw was on the working capital peg and the earnout structure. Even if you agree on an SDE-based valuation, the buyer will often push a chunk of the price into an earnout tied to future performance. So your 'final exit paycheck' isn't just SDE times multiple. It's that number minus adjustments, minus rollover equity if you're doing that, minus taxes. SDE gets you in the ballpark but the deal structure determines what actually hits your bank account.
My buyer normalized my SDE by cutting my salary add-back in half. Said the replacement manager would cost more than what I was paying myself. That alone knocked six figures off the price. So yeah, SDE matters, but whose version of it matters more.
That's exctly the kind of thing I'm worried about. Did you push back on the salary add-back? Or did you just accept it to keep the deal moving?
Pushed back with market data on manager salaries. Got them to move a little but not all the way. At some point you have to decide if you're willing to walk over it. I wasn't.
What multiple range are we talking here? Because SDE impact is very different at 3x vs 6x.
Good point. At 3x every $10k of SDE reduction costs you $30k. At 6x it costs $60k. The buyer knows this and will fight harder on add-backs when the multiple is higher. It's not just about the nujber, it's about the leverage.
I sold last year. My advice: get your SDE audited by a third party before you go to market. I didn't, and the buyer's accountant found things I'd missed. Nothing fraudulent, just aggressive add-backs I couldn't defend. Cost me about 15% of the headline price.
Who did you use for the audit? Was it expensive?
A local CPA firm that specializes in small business transactions. Cost around $4k. Worth every penny in hindsight.
4k is cheap compared to what I've seen buyers knock off. And they'll use your own numbers against you if you're not careful. Better to know your weak spots first.
Can someone explain what's actually included in SDE? I've read definitions but they seem to vary. Does it include owner's salary? Health insurance? Retirement contributions? My broker keeps saying 'seller's discretionary earnings' like that's self-explanatory.
There's no universal standard. Generally it's net income plus owner compensation plus discretionary expenses like personal vehicles, travel, one-time costs. But every deal is different. Get the definition in writing before you sign anything.
And make sure the buyer's definition matches yours before you get too far into negotiations. I've seen deals fall apart because the two sides were working from different SDE numbers the whole time.
This has been helpful. Sounds like the lesson is to define SDE clearly, be conservative with add-backs, and expect the final number to be lower than what you first calculate. Any other traps to watch for?