What is Owner Benefit?
The Short Answer
Owner Benefit explained simply
Owner Benefit, also known as Seller’s Discretionary Earnings (SDE), is a key number in valuing small to medium-sized businesses. It shows the total financial gain an owner gets from their business. This includes their salary, any perks they receive, and the business’s net profit, all before taxes. We also add back any expenses that a new owner might not have, like one-time costs or personal expenses run through the business. It gives a clear picture of the cash flow available to a single owner-operator.
Real-World Example
The Coffee Shop Scenario
Let’s say a coffee shop owner reports a net profit of $70,000. The owner also pays themselves a salary of $50,000 and uses the business account to pay for their personal car lease, which is $5,000 a year. They also had a one-time expense of $2,000 for a new espresso machine that broke down.
To calculate the Owner Benefit (SDE):
- Net Profit: $70,000
- Owner’s Salary: +$50,000
- Personal Car Lease (add-back): +$5,000
- One-time Espresso Machine Repair (add-back): +$2,000
Total Owner Benefit (SDE): $127,000
This $127,000 is the total financial benefit the owner receives from the business.
Why this matters
Owner Benefit is important because it shows the true earning power of a business for a single owner. It helps buyers understand how much money they could realistically make. It also helps sellers price their business fairly, as it focuses on the actual cash flow available to an owner.
When calculating Owner Benefit, be honest about what expenses are truly discretionary. Buyers will scrutinize these numbers, so make sure your add-backs are justifiable and clear.
When calculating Owner Benefit, be honest about what expenses are truly discretionary. Buyers will scrutinize these numbers, so make sure your add-backs are justifiable and clear.
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