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owner earnings

Also called: SDE, seller's discretionary earnings, seller discretionary earnings

A small business's yearly profit before paying its owners anything: revenue minus all costs except the founders' own pay and perks. Also called seller's discretionary earnings (SDE); buyers of small businesses often price them as a multiple of it.

Owner earnings, also known as SDE (seller's discretionary earnings), is the profit a small business makes before it pays its owners: take revenue, subtract every cost of running the business, but add back the founders' own salaries, bonuses and personal perks paid by the company. It answers the buyer's question "how much money does this business produce for whoever owns it?"

It's the standard yardstick for valuing small, owner-run businesses, including small SaaS companies, because in them the line between "salary" and "profit" is set by the founders. One founder pays themselves a lot and shows little profit; another pays themselves little and shows a lot. Adding the owners' pay back makes such businesses comparable. Buyers then apply a multiple to the yearly figure.

The catch is that someone still has to do the founders' work after a sale. If the buyer must hire a developer and a salesperson to replace them, those salaries come out of the owner earnings, and the buyer will price that in. That's why a business that already runs without its founders is worth more at the same owner earnings: less of the money has to go to replacing them.

Example

In October of year 2 GarageDesk's MRR is 165,000 UAH. Costs without the founders are 67,000 UAH a month (part-time support 16,000, a contract developer 35,000, tools and SMS 12,000, an accountant 4,000). Each founder pays themselves 40,000 UAH.

Owner earnings = 165,000 − 67,000 = 98,000 UAH a month, 98,000 × 12 = 1,176,000 UAH a year. A buyer's offer of 6,000,000 UAH is 6,000,000 / 1,176,000 ≈ 5.1 times owner earnings. After the founders' own 80,000 UAH, the profit left is only 18,000 UAH a month, which is why the buyer asks how much of Nina's and Oscar's work would need to be replaced.

Common mistakes

  • Adding back more than the owners' pay. Only genuine owner costs go back in; a needed employee's salary stays a cost.
  • Ignoring the cost of replacing the founders. If someone must be hired to do their work, the buyer will subtract it.
  • Mixing it with EBITDA. EBITDA counts a market salary for every role, owners included; owner earnings doesn't.
  • Using one lucky month. Buyers look at the last twelve months and the trend.