Valuation method

Seller's discretionary earnings

Seller's discretionary earnings describes what a single working owner takes out of a business in total. It is the standard base for valuing small owner-operated companies.

The calculation

Start from operating profit. Add back the owner's remuneration and benefits, one-off costs, private costs run through the company, and non-cash items such as depreciation where relevant.

The result answers a specific question: what would an owner who works in the business have available in a year, before financing and tax.

Why it exists

In owner-run companies the reported profit says as much about tax planning as about performance. One owner pays themselves a minimal salary, another a generous one; the underlying businesses can be identical.

Normalising to a single measure makes those two comparable, which is the only way a multiple drawn from other transactions means anything.

Where it breaks down

The method assumes one working owner. With two or three active shareholders, adding back all of their remuneration overstates what a single buyer could earn.

It also assumes the buyer will work in the business. A buyer who intends to hire a manager has to deduct that salary again, which is why larger transactions move to EBITDA as the base.

Presentation

Every add-back needs a reference to the accounts and a one-line explanation. A list of adjustments without evidence is the fastest way to lose credibility in due diligence, and the adjustments removed at that stage are never recovered.

All valuation methods