Seller's Discretionary Cash Flow
The pre-tax earnings of the business before non-cash expenses, one owner's compensation, interest expense or income, as well as one-time and non-business related income and expense items. If there are additional owners working in the business, their compensation needs to be adjusted to market rates.
What It Means
Seller's discretionary cash flow or SDCF is a common cash flow based measure of business earnings for owner-operator managed businesses. According to the International Business Brokers Association, SDCF can be determined as follows:
Using SDCF in business valuation
I. Multiple of discretionary earnings method
Business Valuation based on Discretionary Earnings
II. Valuing a business by market comparisons
Frequently, the SDCF is also used to develop business pricing multiples and is a key factor in many market-derived pricing formulas and business valuation Market Comps.
SDCF is also called seller's discretionary earnings (SDE).
Business Valuation Tools