Seller's Discretionary Earnings: The Number That Drives Your Sale Price

If you've started exploring a sale, you've probably run across a term called Seller's Discretionary Earnings (SDE, for short).

It's the most important number in a small business sale, and also the most misunderstood.

Here's how it actually works.

What SDE Is

SDE starts with your net income: the bottom line on your P&L.

Then it adds back the things a new owner wouldn't necessarily incur.

The most common addbacks look like this:

• Your salary as the owner-operator

• Personal expenses running through the business (car, phone, meals,

travel that a new owner wouldn't replicate)

• Non-recurring items like a one-time repair or legal settlement, and

non-cash charges like depreciation

The goal is to capture what the business would actually earn in the hands of someone else.

The Math Behind Your Sale Price

Once you have an SDE number, buyers apply a multiple. For a well-run wedding venue, that's typically somewhere between 2.0x and 4.0x, depending on a range of factors we'll come back to.

Here's the rough math. If your SDE is \$300,000 and buyers apply 3x multiple, your business is worth around \$900,000. If SDE is \$500,000 and the multiple is 3.5x, you're at \$1.75M.

This dynamic can create disconnects between asking price and offer price. You may list your business using one SDE number and a higher multiple while a buyer may think SDE is a different number and offer a lower multiple

What Moves the Multiple Up or Down

Higher multiples go to venues that have tenured staff, are not dependent on the owner to function daily, have diversified revenue across weddings, corporate, and social events, have strong online reputations with positive reviews, and can show clean financials to a buyer.

Lower multiples apply when there's concentration risk, key-person dependency, financials that are hard to parse, recent business performance choppiness, or a looming capital need the buyer would have to fund.

What This Means for You

The most valuable thing you can do before a sale, especially well before you list on a brokerage site, is figure out what your true SDE actually is.

A lot of owner-operated venues look less profitable than they are on paper. The owner's lifestyle runs through the business in ways that don't show up as clean income on a standard P&L. A good accountant or business broker can help you reconstruct that number honestly.

A \$50,000 increase in your documented SDE, applied at a 3x multiple, is \$150,000 in sale price. Getting SDE right matters both to you and the buyer.

Stonecrest Weddings \| Charlotte, NC \| www.stonecrestweddings.com