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Seller's Discretionary Cash Flow

Definition

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:

  • Start with the business pretax earnings.
  • Add non-operating expenses and subtract non-operating income.
  • Add unusual or one-time expenses, subtract non-recurring income.
  • Add depreciation and amortization expenses.
  • Add interest expense, subtract interest income.
  • Add a single owner's total compensation.
  • Adjust compensation of all other business owners to market value.

Using SDCF in business valuation

I. Multiple of discretionary earnings method

SDCF is used as the income basis for the Multiple of Discretionary Earnings business valuation 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.

You can estimate the SDCF by using the business recast financials, especially its Profit and Loss Statement, and factoring in the addbacks.

SDCF is also called seller's discretionary earnings (SDE).

See Also