Welcome back fellow investopreneurs!

As more business owners pilot our new platform to build equity and unlock capital, we’ve seen a steady rise in the number of deals we’re helping move forward.

Just this past week, several owners going through the valuation process asked a familiar pair of questions:
“What is my Monies Multiple, and how is it actually applied?”

So in this week’s newsletter, we’re taking it back to basics—breaking down one of the most important building blocks in business valuation: Seller Discretionary Earnings (SDE) and how it directly influences your valuation using the Monies Multiple.

🧠 What Is Seller Discretionary Earnings (SDE)?

Seller Discretionary Earnings (SDE) is a critical financial metric used to understand the true earning power of a small business when operated by a single full-time owner. It provides a normalized view of cash flow that reflects how much money the owner truly takes out of the business — either in direct compensation, personal perks, or one-time discretionary decisions.

🧾 SDE = Net Profit + Add-Backs

At its core, SDE starts with net profit (bottom line on the income statement) and adds back various expenses that are:

• Non-essential to operations

• Unique to the current owner

• Non-recurring in nature

These add-backs may include the owner's salary, vehicle expenses, personal travel, health insurance, retirement contributions, one-time legal or consulting fees, depreciation, and amortization.

🔍 Why Is It Owner-Specific?

SDE is unique because it assumes that the buyer is an owner-operator, not a passive investor. It consolidates all the economic benefits available to that owner, including:

• Take-home pay (e.g., salary and distributions)

• Personal benefits (e.g., car, phone, insurance)

• Control over expenses (e.g., how aggressively to reinvest vs. distribute profit)

This distinction is key. Unlike EBITDA (which is used for larger or investor-led businesses), SDE reflects lifestyle-adjusted cash flow. It answers the question:

🏢 Why It's Ideal for Small and Mid-Sized Businesses (SMBs)

Most small businesses under $5 million in revenue are closely held, with the owner deeply involved in day-to-day operations. These businesses often blend personal and business finances, which can obscure the actual profitability of the business when viewed through a standard accounting lens.

SDE brings clarity and comparability by removing the noise of personal, discretionary, or one-off decisions and presenting a clean, normalized figure.

It's also the default benchmark used in business valuations, broker listings, SBA financing, and small business acquisitions. Buyers use SDE to evaluate if the business can:

• Replace their income

• Pay off debt or investors

• Provide return on investment

⚠️ A Note on Accuracy

SDE is only useful if it’s accurately calculated and transparently presented. Inflating add-backs or hiding expenses will not only turn off potential buyers or capital partners — it can also increase scrutiny during diligence, reduce deal confidence, or even blow up a deal entirely.

That’s why clean books, a clear paper trail, and well-documented add-backs are essential.

🧩 SDE as the Foundation for Value and Capital

In most small business valuation models, SDE acts as the baseline for determining business value using the formula:

(SDE × Monies Multiple) × Risk Ratio Discount = Business Value

And within capital frameworks, it informs:

• Underwriting criteria for access to revenue-based financing or equity lines of credit

• Profitability scores used to determine capital readiness

• Benchmarks for buyouts, earnouts, or investor returns

If you’re an SMB owner looking to exit, raise capital, or improve the value of your business — SDE is where it all starts. It’s your scoreboard for how much money you’re really making and how much value your business can command in the market.

So whether you're an operator, buyer, investor, or advisor—mastering SDE is non-negotiable in any profitable and sustainable business journey.

📊 How to Calculate Seller Discretionary Earnings (SDE)

At its core, calculating Seller Discretionary Earnings (SDE) is about reverse-engineering your financials to reveal the true economic benefit a full-time owner-operator receives from the business. It’s not just about your net profit—it's about your total financial control and lifestyle value extracted from the business.

✅ The SDE Formula (Expanded View)

Here’s the foundational formula you’ll use:

Each of these components plays a critical role in revealing how much actual value is flowing to the owner, and each one must be clearly documented.

🔍 Let's Break It Down

1. Net Profit

This is your business's bottom line from your income statement—after all standard expenses have been deducted from revenue. It’s your official profit figure before we begin adding back owner-specific items.

2. Owner’s Salary and Compensation

If you’re actively working in your business, your salary (or guaranteed payments in an LLC) is a direct benefit to you as an owner-operator.

3. Non-Recurring Expenses

These are one-time costs that are not expected to recur post-sale. They distort the real earning power of the business, so they’re added back to show normalized profitability.

Examples:

• One-time legal or accounting fees

• Rebranding or redesign costs

• Major repair not typical of ongoing maintenance

• Equipment upgrades unrelated to normal operations

4. Discretionary Expenses

These are owner-specific lifestyle expenses or fringe benefits that are not necessary for operating the business but are expensed through the business for tax purposes.

Examples:

• Personal travel labeled as business trips

• Meals & entertainment unrelated to operations

• Vehicle expenses (if used personally)

• Home office or rent subsidies

• Club memberships or family cell phones

5. Interest

Interest expenses are added back because they are tied to the current owner’s specific capital structure and may not apply to the buyer. The buyer may use cash or different financing.

6. Depreciation & Amortization

These are non-cash accounting expenses related to the reduction in value of tangible and intangible assets. They don’t affect actual cash flow and are added back to reflect true earnings.

🧾 Other Common Addbacks

• Owner’s health insurance and retirement contributions

• Salaries or wages paid to spouses, children, or relatives who don’t work in the business (or who won’t post-sale)

• “Excess” rent if the business pays above-market rent to a building the owner personally owns (adjusted to market rates)

• Charitable contributions or donations run through the business

⚠️ A Word of Caution: Add-Backs Must Be Verifiable

Add-backs are the most scrutinized part of an SDE calculation—and for good reason. If you overstate or manipulate them:

• You erode buyer trust

• You reduce your credibility with lenders or investors

• You increase the risk of a deal falling apart during due diligence

🧮 Example SDE Calculation (Simplified)

This paints a clear picture of what a buyer could expect to “take home” if they stepped into the owner’s role.

To illustrate how it works, consider this hypothetical business:

• Net Profit: $80,000

• Owner’s Salary: $60,000

• Personal Car Lease (paid through business): $7,000

• One-Time Website Redesign: $5,000

• Depreciation: $8,000

• Amortization: $4,000

• Owner’s Health Insurance: $6,000

SDE = $80,000 + $60,000 + $7,000 + $5,000 + $8,000 + $4,000 + $6,000 = $170,000

🔚 Summary

Calculating SDE is both an art and a science. You need clean books, clear justification for every add-back, and a defensible explanation that aligns with how a buyer would actually run the business.

When done correctly, SDE provides the foundation for:

• Business valuation

• Access to capital

• Building wedge equity

• Planning for an exit

• Understanding your true earning power as an owner

🧾 Seller Discretionary Earnings (SDE) Calculation Worksheet

📍 Business Info

• Business Name: ______________________________

• Fiscal Year Ending: __________________________

• Prepared By: ________________________________

• Date: ______________________________________

📊 Step 1: Base Profit

💼 Step 2: Add Back Owner Compensation

🔁 Step 3: Add Back Non-Recurring Expenses

💳 Step 4: Add Back Discretionary / Personal Expenses

🧾 Step 5: Add Back Non-Cash & Financing Costs

✅ Final Calculation

📌 Notes & Assumptions

Use the space below to document any assumptions, details, or clarifications related to the add-backs listed above: