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Real Estate · Valuation

Seller Discretionary Earnings

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Use SDE when evaluating owner-operated real estate services or mixed business-property opportunities.

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Interactive workbench

Owner-operated earnings

Net Income+Owner Salary+Discretionary Expenses+One-Time Expenses

The adjusted seller discretionary earnings equal $310,000.

Step 1 of 5

Variables and units

  • Net Income

    Reported net income.

    currency

  • Owner Salary

    Owner compensation add-back.

    currency

  • Discretionary Expenses

    Personal or discretionary add-backs.

    currency

  • One-Time Expenses

    Nonrecurring expenses.

    currency

Common mistakes

  • Adding back expenses that a buyer will still incur.
  • Counting the same add-back twice.

Step-by-step example

Owner-operated earnings

  1. 1. Start with the example inputs

    • Net Income$180,000
    • Owner Salary$90,000
    • Discretionary Expenses$25,000
    • One-Time Expenses$15,000

  2. 2. Apply the formula

    Net Income+Owner Salary+Discretionary Expenses+One-Time Expenses

  3. 3. Run the numbers

    $310,000.00

    The adjusted seller discretionary earnings equal $310,000.

What this result means

Seller discretionary earnings of $310,000.00 estimate the total annual benefit a single owner-operator takes from the business — reported profit plus owner salary and discretionary or one-time costs added back. Small businesses are commonly priced as a multiple of SDE, so verify every add-back: anything a buyer would still have to pay for doesn't belong in it.