The Journal · Value
How a buyer reads your P&L
A buyer doesn't take your profit line as given. They rebuild it into seller's discretionary earnings, and every offer starts from that number.
Omnira Partners · · 3 min read
A buyer doesn't read your profit line. They rebuild it. They add back some costs, take out others, and end up with seller's discretionary earnings, or SDE. That's the number a multiple gets applied to. It isn't your revenue, and it isn't the net income line on your tax return.
If you want to know what you'll be negotiating from, rebuild the number the way they will, before they do.
What a buyer adds back
Add-backs are costs on your books that a new owner wouldn't carry, or that don't reflect how the business really earns.
Owner pay is the first. Most owners pay themselves more than a hired manager would cost. The part above a manager's wage goes back into the earnings, since a buyer could run the business on that wage.
Personal expenses are the second. That's the truck, the phone, or the trip that went through the business. A new owner won't have those costs, so they come back in.
One-time costs are the third, like a lawsuit, a flood or a move to a new yard. If it won't happen again, it doesn't belong in a normal year.
Depreciation is the fourth. It's a cost on paper, but no cash leaves the business, so it goes back in too.
What a buyer takes out
This is the side owners tend to skip. Buyers don't.
If you own the building and charge yourself nothing, the buyer charges the business rent at market. That rent comes off the earnings.
If you're the one running dispatch at 6am, somebody has to do it after you leave. The buyer takes a manager's salary out of the number.
If the trucks should have been replaced already, that's deferred maintenance. The buyer sees money they'll spend soon after close, and subtracts it.
Then there are your customers. Some of them are loyal to you, not to the company. The revenue that leaves when you do isn't revenue the buyer gets, and they'll discount it.
What's left is SDE
After the add-backs and the take-outs, what's left is seller's discretionary earnings. It's what one owner-operator actually takes out of the business, normalized.
The multiple gets applied to that figure. So a mistake in the earnings carries straight through to the price. We cover the multiple itself in what your business is actually worth.
The add-back nobody believes
Every add-back needs a receipt. The buyer's lender will ask for the invoice behind the one-time cost.
If you can't produce it, the add-back comes back out of the number, and so does a little of the buyer's trust. After one line fails, they read the rest of your numbers harder. Chasing an old invoice in the middle of a deal is a bad week for everyone, so collect the paper as you go.
Rebuild it before they do
Run your last three years this way, on one page. Put owner pay at a manager's wage, pull the personal costs, list each one-time cost with its invoice, charge yourself market rent, and be honest about the trucks and the customers who follow you.
The number you find is the one you'll be negotiating from, whether you're the buyer or the seller. If you're buying, the seller's P&L gets the same treatment.
The page we build
We build that page with owners: three years, normalized, with the receipts behind every line, before a lender or a buyer ever asks.