Seller's Discretionary Earnings

What is Seller's Discretionary Earnings?

SDE is a measure of a company's profitability that takes into account all revenues and expenses Since the rise of aggregators, a number of alternative margin definitions have made their way into the e-commerce industry. Seller's Discretionary Earnings ("SDE") is one of them, and given the increasing importance of this margin for e-commerce acquisitions and sales account acquisitions, we will explain this definition in more detail for you on this page with some examples and an elaboration on the common use of this margin calculation.

What is Seller Discretionary Profit?

SDE is a measure of the profitability of a business that takes into account all revenues and expenses that the owner has discretion to manage. It is a way to measure the profitability of a business independent of the owner's personal spending or investment choices. As such, it is primarily used in relatively small business acquisitions where the business's income can be viewed primarily as the entrepreneur's "salary" and, to a more limited extent, the return he or she makes on invested capital. With the SDE, a buyer actually assesses what he or she will receive in total monthly income (salary + profit) after the acquisition.

How is Seller's Discretionary Earnings calculated?

The calculation of SDE begins with a company's net profit. It then adds certain expenses that the owner can manage as he sees fit, such as salary, private expenses ("normalizations"), depreciation, interest and taxes. In other words, SDE is normalized EBITDA plus distributed entrepreneurial salary. These costs are added because they do not necessarily reflect the operational costs of the business, but rather the owner's personal choices.

For example, if the owner of a company decides to pay himself a higher salary than what is typical for his role, this would reduce the company's net profit. But because this is a discretionary expense, it would be added to the SDE to give a more accurate picture of the company's profitability.

What is the benefit of SDE?

The advantage of the Seller's Discretionary Earnings measure is that it standardizes a company's results. This makes them better and easier to compare with e-commerce standards and allows the price of the online business or sales account in question to be compared with past prices of equivalent businesses with a higher degree of reasonableness.

Seller's Discretionary Earnings in business acquisitions

Most e-commerce takeovers use a so-called 'multiple' (i.e. x times the profit) to determine the price. Often a multiple on EBIT or EBITDA is used. This is a good starting point (although we prefer a Discounted Cash Flow calculation, a multiple also provides guidance), but for sellers who have been squeezing their profits for years or pay themselves a (too) high salary, a multiple on the unadjusted EBIT(DA) may turn out to be worse than necessary. A multiple on Seller's Discretionary Earnings then gives a higher outcome, which also better reflects the underlying results.

Conclusion from Businessforsale.eu

The Seller's Discretionary Earnings is primarily used in small acquisitions, where an individual buyer assesses what he or she will earn monthly after acquiring the reviewed online business or sales account. For buyers, it is a useful tool for assessing their future financial situation.

The relationship to the term "business value" is tricky, however, because entrepreneurial hours (paid or not) are a cost that must be factored in left or right when trying to determine the value of a shop or account.

The term has come over from the US with the advent of aggregators and we expect Seller's Discretionary Earnings to become more widely used by both buyers and sellers. Given the simplicity and additional insight this metric provides, we will also communicate the SDE more actively in the profiles of online businesses for sale and sales accounts on our platform.