The video explains the concept of Seller's Discretionary Earnings (SDE) and the importance of 'add-backs' in business valuations. SDE represents the profit a business generates, but it often needs adjustment to reflect the true profitability for a new owner. Add-backs are specific adjustments made to the reported profit to account for expenses that are personal to the seller or not essential for the business's ongoing operation. Examples include inflated salaries paid to family members who don't actively contribute, personal expenses disguised as business costs (like holidays), or a seller's salary that can be replaced by a much lower market rate. The process of making these adjustments is called 'recasting' or 'normalizing' the financials. The ultimate goal is to determine the actual, sustainable profitability of the business under new ownership.

Carl Allen - Dealmaker

SDE stands for Sellers Discretionary Earnings. Sometimes with deals, you have to deal with ADB backs. An addback is when the business is generating this level of profit today, but when the owner sells it to you, the profitability might be different. You have to adjust those profits.

There might be family members in the business that are paid that are not actually there. There might be holidays or other personal expenses that the seller's taken out. The seller might be paying himself a million dollars a year, but it might only cost you $100,000 a year to replace that salary.

So, we've got to make all these adjustments, and that phrase is called recasting or normalizing. It's determining what's the actual profitability that the business will have when you become the owner.

SDE or Sellers Discretionary Earnings is all about adjusting profits in business deals.

sde stands for sellers discretionary
earnings sometimes with deals you have
to deal with ADB backs and addback is
when the business is generating this
level of profit today but when the owner
sells it to you the profitability might
be different you have to adjust those
profit there might be family members in
the business that are paid that are not
actually there there might be holidays
or other personal expenses that the
seller's taken out the seller might be
paying himself a million dollars a year
but it might only cost you $100,000 a
year to replace that salary so we've got
to make all these adjustments and that
phrase is called recasting or
normalizing it's determining what's the
actual profitability that the business
will have when you become the owner

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SDE or Sellers Discretionary Earnings is all about adjusting profits in business deals.

Transcription