What are Seller’s Discretionary Earnings?

When doctors and dentists are thinking about selling their practice to a new owner, they often hear the acronym SDE thrown around.  Here we answer the most commonly asked questions related to SDE.  

What does SDE stand for?

SDE stands for Seller’s Discretionary Earnings.  

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’s been paid except for the doctor.  For example, once the owner has paid rent, payroll to staff, and procedure supplies, what cash is left in the bank account?  At the end of the day, what could they pay themselves?  That’s Seller’s Discretionary Earnings.  

Because SDE is often used interchangeably, but erroneously, with other terms, it’s worth clarifying what SDE is and what it is not. 

What Seller’s Discretionary Earnings are:

  1. Seller’s Discretionary Earnings are used to evaluate smaller businesses, generally selling for less than $2M
  2. Seller’s Discretionary Earnings are most often calculated in doctor-to-doctor sales (when one solo practitioner is selling to another solo practitioner)
  3. Seller’s Discretionary Earnings are also called Recast Earnings or Owner’s Benefit.
  4. Seller’s Discretionary Earnings are calculated annually or for the trailing twelve month period (TTM)

What Seller’s Discretionary Earnings are not: 

  1. Seller’s Discretionary Earnings (though  very similar) are not EBITDA
  2. Seller’s Discretionary Earnings are not 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), owners can compensate themselves in different ways.  Two common methods are:

  • Distribution depending on the set up of their entity
  • 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.   

Questions often asked by buyers after Seller’s Discretionary Earnings are calculated:

  • Does this number support my lifestyle?

Questions often asked by sellers after Seller’s Discretionary Earnings are calculated?

  • What multiple of SDE am I going to get for my practice?

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 for the different ways single doctor practices pay themselves.

Candice DePrang Boehm

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Your credibility and your reputation are affected by whether or not you take these first three steps. Once you’ve followed up on these items, you can then begin to consider if you want to stay around for some time, or retire right away and think through who you want to buy your practice.

How Do I Sell My Dental Practice?