Seller's Discretionary Earnings Calculator

This page does two jobs that owners usually confuse with each other. The first is producing the earnings figure a buyer or valuer actually prices from, which is almost never the profit shown in your annual accounts. Reported profit is calculated to satisfy tax rules and generally understates what an owner-operator really takes out, because it is stated after your own salary, after any personal costs run through the business, after interest on borrowing a buyer would not inherit, and after non-cash charges like depreciation. Adding those back gives seller's discretionary earnings, the standard basis for pricing owner-operated businesses in New Zealand. The second job is more uncomfortable and more useful if you are not selling: it answers whether the business is genuinely profitable once you pay yourself what the role is actually worth. Many owners are running a business that looks profitable only because they are working for below market rates, and the gap between SDE and adjusted EBITDA is precisely the size of that subsidy. The page also normalises rent paid to a trust or company you control, because a buyer will make that adjustment whether or not you do, and it is far better to arrive with it already made.

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Your Accounts Understate What You Earn

Annual accounts are prepared to work out tax. They are not designed to show what an owner takes from a business, and for an owner-operated company they almost always understate it.

On the worked example the accounts say $185,000.00. The owner actually receives that, plus an $85,000.00 salary, plus $14,500.00 of personal costs carried by the business, plus the benefit of $18,000.00 of above-market rent paid to their own trust. The business also absorbed $38,000.00 of interest on borrowing a buyer would refinance, $48,000.00 of non-cash depreciation and amortisation, and $23,000.00 of costs that will not repeat.

Add those back and the real annual benefit is $411,500.00, which is $226,500.00 more than the accounts show. That gap is not creative accounting; it is the difference between a tax figure and a commercial one.

Worked Example: $185,000 That Is Really $411,500

Reported profit before tax of $185,000.00, then eight adjustments.

Owner salary of $85,000.00 comes back because a buyer will take the salary themselves. Personal expenses of $14,500.00 come back because they would not continue. Interest of $38,000.00 comes back because financing is the buyer's decision. Depreciation of $42,000.00 and amortisation of $6,000.00 come back because they are not cash. One-off items of $23,000.00 come back because they will not repeat. And $18,000.00 of above-market rent comes back because it is a distribution dressed as a cost.

SDE is $411,500.00, which is 22.24% of the $1,850,000.00 of revenue behind it.

The Number That Actually Matters If You Are Not Selling

SDE is a selling figure. The more searching question is whether the business works when you are paid properly, and the answer is adjusted EBITDA.

Employing someone to do the owner's job costs $120,000.00. Deducting that from SDE gives $291,500.00 of adjusted EBITDA. Take off depreciation and amortisation and interest, and true profit before tax is $205,500.00.

Compare that to the reported $185,000.00 and the business is $20,500.00 more profitable than its accounts suggest. That happens because the personal costs, the one-offs and the excess rent were inflating expenses by more than the owner's underpayment of $35,000.00 was flattering them.

The reverse is more common. An owner drawing $50,000.00 for a role worth $120,000.00 is subsidising the business by $70,000.00 a year, and a business that only shows a profit because of that subsidy is not profitable, it is a job with extra paperwork and personal risk. Our guide on how much to pay yourself works through setting that figure.

The Gap Between SDE And EBITDA Is Key Person Risk

On the worked example, SDE of $411,500.00 against adjusted EBITDA of $291,500.00 means 29.16% of the earnings depend on the owner doing the work.

Buyers price that. A business where the owner is one of several contributors carries less risk than one where the owner holds every customer relationship, and it earns a higher multiple as a result. This is why two businesses with identical SDE can sell for very different amounts.

If a sale is two or three years away, closing that gap is usually worth more than growing revenue. Documenting processes, moving customer relationships to staff, and hiring the manager before you sell rather than after all convert a well-paid job into a business someone else can run.

Be Disciplined With Add-Backs

Every line will be tested in due diligence, and a schedule that overreaches damages your credibility on the legitimate items.

The clean add-backs are owner remuneration, evidenced personal expenses, interest, depreciation, amortisation and genuine one-offs. The ones that get challenged are vague management fees, entertainment described as non-recurring, and one-offs that show up in more than one year.

The related party rent adjustment cuts both ways and is worth checking before a buyer does. Paying $96,000.00 where market is $78,000.00 adds $18,000.00 to SDE. Paying $60,000.00 where market is $78,000.00 would reduce SDE by $18,000.00, because the business has been enjoying a subsidy that ends at settlement.

From Valuation To What You Bank

At 2.5 times SDE the indicative value is $1,028,750.00, with a range from $823,000.00 at 2x to $1,234,500.00 at 3x. That spread of over $400,000 on the same earnings is why the multiple conversation matters as much as the earnings one.

None of those figures is what you receive. Bank debt is repaid at settlement, your shareholder current account comes back to you, broker and legal fees come off, and any earnout is contingent. Our Business Sale Proceeds Calculator takes a headline price through to net cash, and our Business Valuation Calculator approaches value from other methods for comparison.

Related NZ Business Valuation Calculators

• Business Valuation Calculator: other approaches to the same question.
• EBITDA Calculator: the unadjusted starting point.
• Business Sale Proceeds Calculator: what you actually bank from a sale.
• Business Acquisition Calculator: the same deal from the buyer's side.
• Business Health Check Calculator: the ratios a buyer will run.