Most business owners are taught to maximize Seller’s Discretionary Earnings (SDE). It makes sense on the surface—you want to show the next guy how much cash you took home, including your salary, your car lease, and that “consulting” trip to the Maldives.
But there is a ceiling on SDE. Once you cross the $1M–$2M earnings threshold, SDE stops being a tool and starts being a liability.
At this level, you aren’t selling a “job” to an individual; you are selling an enterprise to a sophisticated buyer. Institutional investors—Private Equity, Search Funds, and Strategic Competitors—don’t care what you made. They care about what the business makes after you are gone. This is where EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) becomes the only language that matters.
The “Owner-Operator” Discount
The moment you present a valuation based on SDE, you signal to the market that the business is dependent on you. To a Private Equity firm, an owner-operator is a risk. If the business relies on your personal “discretionary” expenses to look profitable, it isn’t a turnkey asset.
To capture a 6x or 8x multiple, you must “professionalize” your earnings. This means:
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Replacing yourself on the P&L: Replacing your “owner salary” with a market-rate salary for a General Manager.
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Cleaning the “Noise”: Stripping away the lifestyle perks that clutter a standard brokerage P&L.
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The Bridge to EBITDA: A sophisticated exit requires a “Quality of Earnings” (QofE) report that bridges the gap between your tax returns and your true operational EBITDA.
The difference isn’t just accounting—it’s the difference between a 3x multiple from a local buyer and a 7x multiple from a global one. At David Mayfair, we specialize in this migration. We don’t just list businesses; we re-engineer the financials to meet the standards of the world’s most demanding acquirers.
