THE VALUE WORKSPACE / Earnings builder

Build a clearer
earnings picture.

Start with net income. Separate the benefit to one owner from the earnings available after paying someone to run the business.

Reconcile the earnings

Illustrative example populated below. Replace it with your own figures. Use amounts already expensed in your financials, except for the replacement and normalization adjustments.

Annual net income ($)After the expenses recorded in your P&L. Losses are allowed.

Interest expense ($)Interest only; loan principal is not an expense.

Business income tax expense ($)Only tax expensed in this P&L. Exclude personal taxes, sales taxes, payroll taxes, and property taxes.

Depreciation expense ($)Do not also include this amount in amortization.

Amortization expense ($)A separate expense from depreciation.

One owner’s compensation ($)Only compensation already deducted in net income. Do not add distributions or drawings.

One owner’s benefits ($)Only benefits expensed in the P&L; do not repeat them in personal expenses.

Documented nonrecurring expenses ($)Potential adjustments must be supported. Recurring costs are not one-time add-backs.

Documented discretionary expenses ($)Already expensed personal/discretionary items that a buyer would not incur. Count once.

Additional ongoing cost adjustment ($)Positive adds a recurring cost; negative removes a documented excess cost. Exclude owner replacement counted below.

Replacement compensation & benefits ($)Total market compensation needed for the departing owner’s roles. Use zero only if no replacement cost is needed.

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UNDERSTAND THE METHODOLOGY

One reconciliation, two different questions

SDE describes the benefit to one working owner. Adjusted EBITDA in this simplified tool includes the cost of replacing that owner’s operating roles. It is not a full quality-of-earnings analysis.

Unadjusted EBITDA = net income + interest + business income taxes + depreciation + amortization.
SDE = EBITDA + one owner’s expensed compensation and benefits + documented nonrecurring and discretionary adjustments − additional ongoing cost adjustments.
Adjusted EBITDA = SDE − replacement compensation and benefits.

What to check before using the result

Reconcile to tax returns and financial statements, and identify whether the accounts are cash or accrual basis.
Count an expense once. Owner distributions are not automatically expenses or add-backs.
Use a separate operating-cost adjustment for market rent or other recurring costs. Do not repeat replacement payroll.
Accounts with several working owners, unrecorded labor, unusual revenue recognition, or significant related-party transactions need a fuller recast.

Continue your research

SDE vs. EBITDA vs. TTM: How Sellers Should Present Earnings →Quality of Earnings for Sellers: Scope, Add-Backs and Buyer Questions →

Sources & scope

BizBuySell: cash-flow, SDE and EBITDA calculator ↗ — Explains the distinction between owner earnings and managed-business earnings.

Sources explain concepts, not the example inputs. Default multiples, fees, rates, and reserves are illustrative assumptions, not market quotes. Read our methodology policy.