If you’re thinking of selling your practice, likely in a doc-to-doc transition, one of the terms that’s the most valuable is SDE or Seller’s Discretionary Earnings.
At a high level, seller’s discretionary earnings give a potential buyer a snapshot of the profitability of the practice and the money that goes directly to that buyer, which typically includes
- The doctor’s salary and
- EBITDA.
SDE helps the buyer understand what the doctor is getting paid and if there is any money left over after expenses.
Note: seller’s discretionary earnings are calculated before debt service, which means that SDE would not capture if the doctor is paying a mortgage on the building or any other long-term expense financed with debt.
Watch Drew’s overview or keep reading to dive in.
What are seller’s discretionary earnings? / What is SDE?
Seller’s Discretionary Earnings is what a doctor could take home after they pay every required expense to run the business. Said differently, SDE is what’s left after everyone and everything (rent, payroll to staff, procedure supplies, etc) has been paid, except for the doctor.
Because SDE is often used interchangeably, but erroneously, with other terms, it’s worth clarifying what SDE is and what it is not.
Seller’s Discretionary Earnings is:
- Used to evaluate smaller businesses, generally selling for less than $2M.
- Most often calculated in doctor-to-doctor sales (when one solo practitioner is selling to another solo practitioner).
- Also called Recast Earnings or Owner’s Benefit.
- Calculated annually or for the trailing twelve-month period (TTM).
Seller’s Discretionary Earnings is not EBITDA or Cashflow!
Put in mathematical terms: Seller’s Discretionary Earnings = EBITDA + add-backs + doctor’s compensation.
Scroll to keep reading or watch the video below for more information on what SDE means practically and how it impacts a potential purchase.
Other FAQs:
- Why does SDE exist in the first place?
First, SDE answers the question “how much will I make owning this business?”. In small businesses (in this case small, successful practices), owners can compensate themselves in different ways. The two most common methods are Distribution depending on the setup of their entity and Salary. As such, SDE allows an “apples to apples” comparison.
In addition, SDE allows a potential buyer to understand how a practice might grown. For example, if a practice for sale is already maxed out on its production, SDE is probably not going to grow that much. On the other hand, if a practice isn’t producing a lot, but SDE is high, there is likely a higher ceiling. You, as the new practice owner, could make for the practice and take home.
Also, if you’re an associate doctor thinking about buying a practice and putting on an ownership hat, you’ll likely want to compare, “What am I making as an associate in my role?” and “I’m going to control a whole business. Is that salary plus EBITDA worth it to me to take on that responsibility that task of leading people and going and building and growing a successful practice?”
Finally, SDE also gives potential buyers a snapshot. You can really understand, “The day I step into this practice, I’m going to make this amount of money and the practice is worth this much.” Then it’s up to you as an entrepreneur to go build and grow the practice. - Why isn’t SDE used in a sale to a Corporate Group (DSO, MSO, etc..)?
These groups don’t consider the Seller’s Discretionary Earnings because they’ll pay the doctors a salary based on the market. - Why is SDE important?
SDE is important for a couple of reasons.
- In a doc-to-doc sale, the valuation of the practice is often based on some multiple of SDE.
- SDE can signal when a practice isn’t financially healthy. If you have a practice that’s producing 1.2 million but SDE is only $175,000, something is wrong there. There’s a discrepancy that you, as the potential buyer, need to identify about the health of that practice. The doctor should be taking home more, and depending on the market, much more.
- In a doc-to-doc sale, the valuation of the practice is often based on some multiple of SDE.
Bottom Line:
SDE tells a doctor buyer how much cash is left over in the business to do with as they please. Doctor buyers can use SDE to compare multiple practices to each other, normalizing the different ways single-doctor practices pay themselves.
Editor’s Note – this blog was also posted on the blog at TreolarOnline.com, a trusted insurance partner.
