Seller’s Discretionary Earnings or (SDE) comes up when doctors and dentists are thinking about selling their practice to a new owner. Here are the most common questions we get asked about the topic.
What are seller’s discretionary earnings? / What is SDE?
Seller’s Discretionary Earnings are what a doctor could take home or pay themselves after they pay every required expense to run the business. Said in a different way, 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 are:
- 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 are not EBITDA or Cashflow!
Put in mathematical terms: Seller’s Discretionary Earnings = EBITDA + add backs + doctor’s compensation
- Why does SDE exist in the first place?
In small businesses (in this case small, but successful dental or medical practices), owner can compensate themselves in different ways. The two most common methods are: Distribution depending on the set up of their entity and Salary, typically on payroll. In order for a potential buyer to understand how one dental practice stacks up against another. they can simply add the doctor’s compensation back into net income. That way, a buyer can tell how much cash is left over in the practice regardless of how the doctor is paying himself or herself.
- Why isn’t SDE used in a sale to a DSO?
DSO’s don’t consider the Seller’s Discretionary Earnings because they’ll be paying the doctor.
- Why is SDE important?
This figure is important because the valuation of the business is based on some multiple of SDE.
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 for 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.