Sellers Discretionary Earnings is also referred to as Sellers Discretionary Cash Flow, Adjusted Cash Flow, Owner Benefit, Recast Earnings, or Normalized Earnings.
As a business owner, you may choose (at your discretion) to pay expenses that are not part of the regular business operations.
Some examples of these discretionary expenses may include:
- The amount of the owner’s salary
- Family members on the payroll
- Leisure activities, such as business golf outings
- Charitable donations
- The purchase or lease of a vehicle used for business and personal use
Adjusting or removing these expenses will give you the Seller’s Discretionary Earnings, which some may say is the business’ true revenue potential because these expenses are not absolutely necessary to run the business.
Maybe you have taken a below market salary to run the business, and you have a potential buyer who intends to hire someone to replace you. As such, they will need to budget for a realistic salary in the local market (location) for your type of business. This is why you need to provide a consistent number that can be used as a baseline salary for a potential buyer. Then they can do calculations and estimate of how much the business will earn for them.