Key Success Element #12 - Owner's Discretionary Earnings
Owner's Discretionary Earnings: The Number That Sets Your Business's Sale Price
If your business is worth five million dollars or less, its valuation will most likely be based on your Seller’s Discretionary Earnings (SDE) — also called Owner’s Discretionary Earnings. SDE is calculated by adding the salary, payroll taxes, health benefits, retirement benefits, and financial perks you, the owner, were able to provide for yourself, giving a potential buyer a clear picture of the income they can expect.
Run Your Free Business Success Scan NowWhat Makes Up Your Discretionary Earnings
SDE is built from five components of what you, the owner, take out of the business:
Owner’s Salary
The salary you pay yourself as the owner of the business is the starting point for calculating your discretionary earnings.
Payroll Taxes
The payroll taxes paid on your own compensation are added back in, since a buyer is evaluating the total benefit you receive from owning the business.
Health Benefits
Health benefits you provide for yourself as owner count toward your total discretionary earnings.
Retirement Benefits
Retirement benefits you’ve set up for yourself are also included in the SDE calculation.
Financial Perks
Any additional financial perks you were able to provide for yourself round out the total, giving a buyer a full and accurate picture of what the business can pay its owner.
Why Your Owner’s Discretionary Earnings Matter
Typically, 70% of the small businesses on the market are selling for less than $200,000 at a multiple of 3 or less times their SDE, and most of those businesses never sell at all. That’s because owners have often worked hard for years while earning less than $75,000 a year doing so — succeeding only in creating a long-hour, low-paying job that isn’t attractive to potential buyers.
The Bottom Line
By completing and optimizing all 12 key business success elements, the goal is to build your business to at least $100,000 in owner’s discretionary earnings and achieve a 4 or 5 multiple of those earnings — giving you the option to walk away with half a million dollars or more if you elect to sell. Businesses with strong owner’s earnings that have completed and optimized all 12 key success elements are usually very attractive to potential buyers and command a premium price when sold.
Find out exactly where your Owner's Discretionary Earnings stand today and get the resources to optimize them for your business.
Run Your Free Business Success Scan Back To Business Finance Education