What are Seller’s Discretionary Earnings?

(Originally published on Businessbroker.biz)

When the time comes to sell your business, the purchase price will often be at the forefront of your mind. It’s the payoff for potentially many years of hard work, and most business owners want to be adequately compensated for what they’ve built. However, it makes perfect sense that while sellers want to drive the price up as much as possible, potential buyers are often at the other end of the spectrum, looking for the best possible deal before making any kind of commitment.

Of course, a business’s value always needs to be based on reality. Sellers sacrifice future earnings for an immediate lump sum, while buyers want to make back their investment and more in the future. Sales figures alone are not enough to come up with the proper valuation. Those figures are often adjusted according to tax returns. That adjustment is referred to during the sales process as the seller’s discretionary earnings, or SDE.

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