How to calculate seller's discretionary earnings
A laundromat's price is its SDE times a market multiple, so getting the SDE right is the whole game. Start with the net profit on the tax return, which almost always understates the real benefit of ownership because it is written to minimize taxes. Then add back the costs that exist only because of this owner and would not carry to a buyer. The result is the number the valuation calculator multiplies.
Key takeaways
- SDE = net profit + legitimate, documented add-backs.
- Only add back what truly would not recur for a new owner.
- Heavy reliance on add-backs invites buyer scrutiny.
- Subtract a manager's pay if the owner does not work the store.
What counts as a legitimate add-back?
The credible add-backs are documented and genuinely non-recurring for a buyer. The table below is a quick guide to what usually adds back and what does not.
| Item | Add back? | Why |
|---|---|---|
| Owner's salary | Yes | A buyer who runs it keeps this pay. |
| Interest & depreciation | Yes | Depend on the buyer's financing; non-cash. |
| One-time repair or legal | Yes | Will not recur under new ownership. |
| Personal phone / vehicle | Yes | Personal cost run through the business. |
| A manager the buyer keeps | No | That cost continues, so it is not added back. |
| Undocumented cash claims | No | If it is not on the return, it cannot be valued. |
What is a healthy SDE margin?
SDE margin (SDE divided by revenue) is a quick sanity check on the rebuild. The bands below are a rough guide for self-service-heavy stores; a very high or very low margin is worth a second look at the inputs.
Why buyers scrutinize add-backs
Add-backs are where valuations are won and lost. A seller has every incentive to inflate them, and a buyer has every reason to challenge them, because each dollar of SDE is multiplied into the price. Keep the reliance on add-backs honest: if most of the SDE is add-backs rather than real reported profit, expect a buyer to demand documentation for each one and to discount anything that cannot be proven. Then take the verified SDE into the valuation calculator and check the risk in the due diligence risk score.
Common mistakes to avoid
- Adding back cash income that never appears on the tax return.
- Treating a manager the buyer will keep as an add-back.
- Forgetting to subtract a manager's pay when the owner is absentee.
- Relying on add-backs you cannot document with receipts or statements.