What is Adjusted Net Income?
The Short Answer
Adjusted Net Income explained simply
Adjusted Net Income, often called Seller's Discretionary Earnings (SDE) or Owner Benefit, is a way to look at a business's true profit. It starts with the net income shown on the tax return and then adds back certain expenses. These added-back expenses are things that benefit the owner directly or are one-time costs that won't happen again under a new owner. The goal is to show how much money a single owner-operator could realistically take out of the business.
Real-World Example
The Coffee Shop Scenario
Imagine a coffee shop with a reported net income of $50,000. The owner also pays themselves a salary of $40,000, has a company car payment of $5,000 (which is a personal expense), and spent $2,000 on a one-time marketing campaign last year.
To calculate the Adjusted Net Income (SDE):
- Net Income: $50,000
- Add back Owner Salary: +$40,000
- Add back Company Car Payment: +$5,000
- Add back One-Time Marketing: +$2,000
Adjusted Net Income (SDE) = $97,000
This $97,000 is the total financial benefit the owner receives from the business.
Why this matters
Adjusted Net Income is crucial because it gives a clear picture of how much money a business truly generates for its owner. When buying or selling a business, this number helps buyers understand their potential earnings and helps sellers justify their asking price. It levels the playing field by removing expenses that are unique to the current owner.
When we look at a business, Adjusted Net Income is often the first number we check. It tells us the real story of what the business puts in the owner's pocket. Make sure you know what goes into this number.
When we look at a business, Adjusted Net Income is often the first number we check. It tells us the real story of what the business puts in the owner's pocket. Make sure you know what goes into this number.
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