Transaction reality · Before you buy
Seller-reported SDE is not automatically your take-home pay
Published · Reviewed by The Diligence Standard Team · Updated
Seller’s discretionary earnings can help compare owner-operated businesses. It is often misunderstood as the cash a buyer will personally keep.
How it appears in a real transaction
SDE usually starts with profit and adds back certain owner compensation, benefits, interest, taxes, depreciation and claimed one-time expenses. The quality of each adjustment matters. So does the work the owner performs.
A practical example
A listing shows $300,000 of SDE. The buyer needs a $90,000 manager, $70,000 of annual debt service and overdue equipment replacement. The buyer’s usable cash is not $300,000.
What to do next
- Rebuild every add-back from the general ledger.
- Identify the owner’s real weekly duties.
- Include debt service, taxes and necessary reinvestment.
- Compare verified earnings with the total cash you must invest.