Seller's Discretionary Earnings (SDE): What Every FBA Business Needs to Know to Get the Best Deal
If you’re an Amazon FBA seller looking to cash in on your business, one of the most important metrics that will impact your deal value is Seller’s Discretionary Earnings (SDE).
Amazon FBA Aggregators, acquirers, and operators like Perch use SDE to determine an FBA businesses’ valuation. With the pop in Amazon sales due to COVID-19, and, as valuations peak due to more players in the aggregator space, a strong SDE with the appropriate context and Add Backs can be the difference between total financial freedom or just living comfortably.
So, if you’re considering selling your Amazon FBA business, you absolutely need to understand how we think about SDE for two reasons:
So you can use it to maximize your valuation. Keep reading to see how a real seller increased the value of their business by ~$2.2M by simply changing a few things to how they calculated their SDE.
So you can make the diligence process that much more seamless by highlighting the right metrics in the right ways, and we can close the deal in only a few weeks.
What is Seller’s Discretionary Earnings (SDE)?
Simply speaking, SDE is the cash flow and benefits a business has generated over a period of time, typically a year.
The calculation is actually quite simple:
SDE = Net Profit + Add Backs
We generally think of Net Profit along the lines of EBITDA. A simple equation for that is:
EBITDA = Net Earnings + Interest + Taxes + Depreciation + Amortization
Here’s what SDE is not:
It is NOT simply Profit: When we send a letter of intent (LOI), you need to account for your expenses as you wrap your head around our offer. This has a huge impact on the total value of the offer and we don’t want to be misaligned.
It is NOT EBITDA/Net Profits: These don’t include benefits or Ad Backs, which, as you’ll see, can be substantial.
What are SDE Add Backs / Benefits?
Add Backs are essentially any expenses that the business has paid for, but could actually be considered of personal benefit to the owner. We break them up into several categories.
Single Seller Salary: Sellers have a lot of latitude to pay themselves whatever they want out of their profits. Some pay a lot. Others reinvest most of their profits back into the business. Regardless, whatever you end up paying yourself can be added back into the total value of your business when you’re looking to sell. Any salary you pay to a co-owner or employee cannot be added back into the value, however.
Non-Recurring Items: This category encompasses anything that is a single, large income or expense. Few sellers know they can add these expenses back into their business’ value when they sell. Categories include emergency repairs or restructuring costs.
Pain point for sellers and acquirers: Because there can be disputes as to whether an expense is truly non-recurring or if it is likely to occur again, we recommend being very clear and upfront about these items, with solid documentation that makes it easy for us to verify the expense as non-recurring.
Discretionary Expenses: These expenses are non-essential to the business and really only benefit the seller themselves. Think of expenses that you would write off for tax purposes such as personal travel, meals, and medical or life insurance. Though they only have personal value to you as the seller, they can actually be rolled up into the overall value of your FBA business.
Pain point for sellers and acquirers: Again, because it can be difficult to determine when something is truly discretionary, a rule of thumb is to avoid mingling business and personal expenses at least three years before you sell your business. This simplifies the process, but, if you’ve been mingling expenses and are ready to sell today, we’re happy to work with you to find something that’s fair.
To help determine whether something is discretionary in this context, each expense must meet all three of these criteria:
Of benefit to the FBA seller(s)
Not of benefit to the business or its employees broadly
Paid for by the business and expensed on tax returns and P&Ls
SDE Case Study: How a Seller Increased Total Deal Value by ~$2.2M
We recently worked with a seller who was able to greatly increase the value of their total SDE by including just a few categories in Add Backs. It’s a great success story for the seller, who was able to maximize their total value, but also for Perch, who got a great Amazon business for a fair price.
After reviewing a seller’s (highly simplified) Profit and Loss (P&L) Statement, their Net Income was a healthy ~$2,000,000 per year.
However, after taking a closer look at some of the expenses, we found several Add Backs that considerably increased the value of their business.
Once these were all added back into the business, their total SDE jumped up to ~$2,641,000 With today’s multiples of ~3.5x, those ~$641,000 in Add Backs add an additional $2,243,500 to the total valuation.
This is an extreme example, and not every business will be able to claim as many Add Backs as this seller did. Still, it highlights how impactful Add Backs can be for FBA sellers. With every dollar that you can add to your total SDE, you’re multiplying it several times over in your final deal, so don’t overlook Add Backs, even if they end up being relatively small.
Why Sell Your FBA Business To Perch?
Not every FBA Aggregator is going to help you understand SDE. It’s a dance; they want to purchase your business for the cheapest price possible, and you want to maximize your valuation.
But Perch isn’t just another aggregator. We’ve acquired dozens of brands, and over 30% of our acquisitions have been from seller referrals. That’s not the type of number you’d expect from an aggregator that’s handing out unfair deals. We pride ourselves on making fair offers that reward entrepreneurs who have built good businesses. We don’t let the quality of that business get lost on the page of a P&L Statement. We work with our sellers to get an accurate picture of their expenses, and we make offers accordingly.
We want to hear from you! Let us know how we can help you exit with one of the most trusted FBA Acquirers on the market today.