When selling your Amazon business, one of the first things that a buyer will do is look at your financial information and calculate your seller’s discretionary earnings or SDE. Understanding and calculating your SDE before reaching out to buyers is important because it will play a significant role in their valuation processes.
This SDE (seller’s discretionary earnings) calculator guide will give you the necessary information to understand what buyers are looking at and how you can use that information to maximize your valuation.
Seller’s Discretionary Earnings (SDE) is a calculation of the total financial benefit a full-time owner and operator would derive from their small to midsize business on an annual basis.
A business’s overall SDE is generally calculated as an average of the SDE for the 1-3 most recent years, plus interim.
It takes earnings and adds back interest, taxes, depreciation, and other adjustments to show the total financial benefit. Typically, this statistic is used to assess enterprises with gross yearly sales of less than $1,000,000.
SDE is a method of standardizing a company’s earnings, so that they may be compared more precisely to the earnings of other companies and the industry as a whole.
For example, an Amazon FBA brand may want to know how much money it will make in a year. Calculating their SDE provides a clear indication of how much profit they stand to make.
SDE adjusts earnings for past taxes, interest, depreciation, and other factors. By calculating SDE, you’ll gain a better grasp of a company’s profit potential and value – and their prospective improvements.
A business valuation determines the value of the owner’s interest in the company – the simplest way to calculate this is to use the seller’s discretionary income (SDE).
Because it is the core of small business valuation, Seller’s Discretionary Earnings are a crucial indicator to consider when assessing a company. The SDE meaning is to determine how much money a firm brings in for its owner, regardless of who that person is.
It’s calculated by deducting a product’s landing cost (per unit) from the revenue from each product sale, as well as any other charges.
Generalizing the formula;
DE = PIT + NRE – NRI + NOE – NOI + D + A + IE + OWTO
SDE = Net Profit + Add-backs
Here is how to identify each section of the formula:
The net profit of the business is calculated based on EBITDA or earnings before interest, taxes, depreciation, and amortization.
Add-backs are costs that the seller may incur at his or her discretion and that the buyer will not inherit after the sale. They are costs that are re-added to earnings to increase the value of a firm, such as essential expenses that the business has paid for but could be considered of personal benefit to the owner.
Add backs are important for FBA sellers because every dollar added to your total SDE multiplies several times in your final deal. Don’t neglect them, even if it’s only a few dollars.
|Most Common||Discretionary expenses||Non-Recurring||Other|
|Owner Payment||Personal contributions||Lawsuit settlement and other legal expenses||Car expenses|
|Owner Payment Taxes and Benefits||Business travel expenses ||Software and hardware upgrade||Inventory Adjustments|
|Any owner personal expenses||Family mobile phone plan||Relocation, expansion, renovation expenses||Rent charges for home office|
|Depreciation and Amortization||Sponsorships||Application fees||Non operating income|
Something to keep in mind – not everything can be calculated as an add-back.
Here’s a list of all the items that don’t classify as addbacks
Simply put, the primary distinction between EBITDA and SDE is that EBITDA does not include the owner’s pay, whereas SDE does. As a result, SDE will always be a larger site than EBITDA. It’s a good idea to compare EBITDA with SDE.
Amazon aggregators examine a company in a variety of ways:
EBITDA allows a company to be compared to another. SDE shows a company’s surplus potential.
Furthermore, EBITDA is typically used to determine the value of larger organizations, whereas SDE is utilized to determine the value of small and medium businesses.
To summarize, here are the fundamental distinctions between SDE and EBITDA:
With the help of our SDE calculator, you can evaluate the value of the Amazon business you’re trying to sell, gaining a stronger negotiating position.
Benitago focuses on maximizing the profit of the seller by offering a Price Match Guarantee, and 24h free business valuation.
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