MRA Seller's Discretionary Earnings Valuation Calculator
Tutorial
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Step 1: Collect Inputs
Begin by gathering your restaurant’s financials—ideally from the last three years of tax returns and P&L statements. You’ll need:
- Net profit
- Owner compensation (salary, benefits)
- Total interest expense
- Depreciation & amortization
- Any extraordinary, non recurring, or discretionary expenses
These are the standard building blocks the calculator employs.
Step 2: Identify Add Backs to Net Profit
Starting from net income (after all business expenses and taxes):
1. Add back owner compensation
Include any salary or benefits paid to the owner even if they are statutory expenses.
2. Add back family members’ wages paid above market rate or non-contributing
For example, if a spouse is employed but not needed operationally.
3. Add back personal/discretionary expenses
Such as personal vehicle usage, cellphone, entertainment, or club memberships paid via business.
4. Add back interest expense
Unless the incoming buyer will retain the same debt structure.
5. Add back depreciation and amortization
These are non cash charges and don’t reflect actual cash flow.
6. Add back one time or unusual expenses/income
Examples: legal fees, major equipment repair, PPP/EIDL loan misclassified as income.
Step 3: SDE Calculation Formula
SDE = Net Profit
+ Owner Compensation
+ Add Backs (interest, D&A, discretionary, non recurring)
Example:
- Net Profit: $100,000
- Owner Salary: $80,000
- Depreciation: $25,000
- One Time Legal Fee: $8,000
- Personal Vehicle: $12,000
→ SDE = $225,000
Step 4: Adjust for Fair Market Value
To reflect what a new buyer would actually encounter:
- Adjust rent to market rate if current rent is below/above market.
- Replace family-member wages with market salary if they were overpaid or unlikely to continue.
- Normalize discretionary expenses to standard levels.
- Remove short-lived grants/loans like PPP or insurance settlements.
These adjustments ensure the SDE reflects the sustainable earnings a new owner can expect under regular conditions.
Step 5: Apply a Multiple for Valuation
Once SDE is determined, estimate business value by multiplying:
- Typical ranges: 1.5× to 3× SDE (up to ~4× for exceptional, low risk businesses).
Example: SDE $225K × 2.5 = Value ≈ $562,500
Quick Checklist
- Gather last 3 years of accurate financial statements.
- List all discretionary and owner-related expenses.
- Identify and quantify one-off entries.
- Normalize rent, salaries, and discretionary costs.
- Choose a reasonable multiple—typically 2×–3× for a standard local restaurant.
- Validate assumptions with market comparable or consult a broker.
Final Thoughts
Seller’s Discretionary Earnings is the go to metric for valuing single unit or owner operated restaurants because it accounts for the true cash benefit to a new owner. It removes distortions from accounting quirks, owner-specific perks, and abnormal one-off items.
Want help walking through a real financial set, or need guidance choosing a multiple based on location or concept? Please reach out to Kerry Miller kmiller@themassrest.org