Understanding SDE and Why It Matters
When it comes time to sell your business, one of the first numbers buyers want to see is your Seller’s Discretionary Earnings, or SDE. It’s basically your true earning power once you add back the personal and one time expenses that don’t reflect the day to day operations. The higher your SDE, the stronger your valuation looks.
Clearing Up the Tax Misconception
Here’s the good part. Many owners assume that showing a higher SDE means they’ll pay more tax, but that’s not the case. You’re not changing your taxable income when you adjust for discretionary write offs. You’re simply revealing the real earnings that already exist behind the scenes.
What Counts as a Discretionary Write Off
Think about it this way. Maybe you lease your truck through the business, use the company card for your phone plan, or expense a few meals and trips that mix work with pleasure. Those are all valid business deductions that lower your taxable income during the year. When you prepare to sell, you can add them back to show what the business truly earns once those personal perks are removed.
How Add Backs Work in a Valuation
You’re not refiling taxes or claiming extra income. You’re just explaining that while your books show one number for the CRA, the real financial benefit to an owner is higher once these discretionary items are accounted for. It’s a way to be transparent while also showing the full value of the business.
The Importance of Clean Records
Most small and medium sized business owners in Canada use some form of discretionary spending. It’s part of how owner operators are compensated. The important thing is to keep clean records. When your broker or accountant can clearly identify which expenses are personal or one time, buyers feel more confident and are more willing to pay a fair multiple on your SDE.
Using Discretionary Write Offs is a Good Idea
If you’re planning to sell, don’t shy away from those write offs. Get them organized. Every truck lease, phone bill, or family dinner that went through the company helps paint a fuller picture of your earnings, and it won’t increase your tax bill one bit.
