Active95US Business Cash Flow Tool
Seller’s Discretionary Earnings Calculator
Estimate a small business’s normalized annual owner benefit by adjusting reported earnings for one owner’s compensation, non-cash expenses, and supportable discretionary or non-recurring items.
Seller's Discretionary Earnings Calculator
Normalize a small business's reported earnings by adding back one owner's compensation, non-cash expenses, and documented discretionary or non-recurring items.
Disclaimer: This calculator provides an informational estimate only. Adjustments must be reasonable, recurring under new ownership where applicable, and supportable during due diligence. It is not accounting, tax, legal, valuation, or lending advice.
What is SDE?
Seller's Discretionary Earnings estimates the total financial benefit available to one owner-operator before income taxes, financing costs, and selected discretionary or non-cash expenses. It is commonly used to compare and value smaller owner-operated businesses.
What qualifies as an add-back?
A defensible add-back is documented, included in the reported expenses, and not necessary for the business to continue operating under a buyer. Personal expenses, one-time costs, and excess owner compensation may qualify; ordinary recurring operating costs generally do not.
Use the result carefully
SDE is not the same as EBITDA, taxable income, or the cash a buyer will keep. A buyer may need to deduct replacement management, capital expenditures, working-capital needs, taxes, and acquisition debt service.
Normalized earnings estimate
Seller's Discretionary Earnings Report
Calculation summary
Adjustment summary
Detailed additional adjustments
Each add-back should be supported by financial statements, tax returns, payroll records, invoices, or other evidence. Buyers and lenders may accept, modify, or reject individual adjustments.
How the calculation works
Reported net income before income taxes is increased by depreciation and amortization, business interest, one working owner's compensation and related payroll taxes. Other documented discretionary and non-recurring items are then added or subtracted.
How to interpret SDE
SDE is a starting point for assessing owner benefit and small-business value. It should be reviewed across multiple periods for consistency and should not be treated as the buyer's post-debt or after-tax income.
Important considerations
- Use amounts from the same twelve-month period.
- Do not add back an expense more than once.
- Use negative adjustments for unusual income or expenses that will increase under new ownership.
- Account for replacement labor when the seller performs work a buyer will not perform.
This report is an informational estimate and is not accounting, tax, legal, valuation, lending, or investment advice. All adjustments remain subject to verification and professional review.
How the SDE Calculator Works
Seller’s Discretionary Earnings begins with net income before income taxes. It adds back depreciation and amortization, business interest, one working owner’s compensation and related payroll taxes. Documented personal, discretionary, non-operating, and one-time items may then be added or subtracted.
- Basic SDE add-backs: Non-cash expenses, interest, and one owner’s compensation.
- Positive adjustments: Expenses recorded by the business that are personal, discretionary, or unlikely to continue.
- Negative adjustments: Unusual income or expenses expected to increase under new ownership.
Example SDE Calculation
Assume reported net income before taxes of $180,000, depreciation and amortization of $25,000, interest expense of $20,000, one owner’s compensation and payroll taxes of $130,000, and $15,000 of documented additional add-backs. Estimated SDE is $370,000.
How to Interpret the Result
SDE represents estimated annual financial benefit available to one owner-operator before acquisition debt service and personal income taxes. It is commonly used as a starting point for comparing owner-operated businesses and applying a market multiple in a business valuation.
SDE is not EBITDA, taxable income, or guaranteed buyer cash flow. Replacement management, capital expenditures, working capital, taxes, and loan payments may materially reduce the amount available to a buyer.
Frequently Asked Questions
What expenses can be added back?
An add-back should be included in the reported expenses, documented, and unnecessary for normal operations under a buyer. Ordinary recurring business expenses should not be added back.
Can one-time income reduce SDE?
Yes. Enter unusual income as a negative adjustment because it increased reported earnings but is not expected to recur.
How many years should I calculate?
Reviewing the most recent three full years plus current year-to-date results usually provides a more useful trend than relying on a single period.
Can I print or email the report?
Yes. Select View full report after calculating to print, save as PDF, or send the report to your email.
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Disclaimer: This calculator and related content are provided for informational and educational purposes only. They do not constitute accounting, tax, legal, valuation, lending, or investment advice. All adjustments should be supported and reviewed with qualified professionals.