Prepare Seller Discretionary Earnings for a Business Sale

Begin with reported earnings

Seller discretionary earnings describes the financial benefit available to one working owner. It is not the same as revenue, bank deposits or the amount you draw from the business.

Start with reconciled financial statements and tax returns. Keep a schedule that connects each proposed adjustment to the books and a supporting record.

Separate defensible adjustments from wishful ones

Owner compensation, certain personal benefits and genuine nonrecurring costs may need review. The right adjustment depends on the item and the valuation method.

Money received from a loan or an equipment sale is not ordinary operating income. Owner distributions are not automatically another expense to add back.

Include the job a buyer must replace

An owner operator and a buyer hiring a manager can arrive at different cash flow estimates. Document your actual tasks and the cost of replacing them.

Adjusted EBITDA usually reflects market compensation for management. Do not add back a salary and also omit the replacement role that the buyer will need.

Bring a bridge between the records and the price

Create a simple bridge from reported profit to the proposed normalized figure. Buyers need to understand each line rather than accept a round number.

A credible opinion of value also considers customer concentration, lease terms and current operations. A strong adjustment schedule cannot remove transfer risk.

Review working capital terms and the records needed to sell a distribution business.

Put your questions beside your numbers

Use the seller estimate form to describe your business. You can ask about earnings adjustments before deciding whether to pursue a sale.

For a conversation, call (714) 555-0162.