What does the one-owner SDE convention measure?
Seller's discretionary earnings, or SDE, shows earnings benefit for one working owner under a stated calculation. It is useful when readers can trace starting earnings and each adjustment. The term does not remove the work needed to run the business. List those duties with the owner-operated result.
The IBBA professional glossary describes the one-owner discretionary earnings convention and distinguishes adjusted EBITDA with relevant owner functions replaced at market compensation. This is professional vocabulary, rather than a GAAP definition, statutory tax rule, or plumbing pricing benchmark.
Name the owner selected for the calculation and list that person's duties. A plumber-owner may handle service work, estimates, dispatch, supervision, management, and customer contacts. The buyer needs that full picture to understand the amount called owner benefit. The pay entry alone does not show all the work.
The valuation hub provides the broader analysis path. This definition concentrates on the one-owner bridge. Adjusted EBITDA addresses a separate earnings reconciliation, and add-back review tests individual proposed adjustments.
Which starting line should the bridge use?
State the document, dates, accounting basis, and exact starting line. A tax return, internal profit and loss report, and accrual statement can use different timing or categories. Ask the accountant to match the records and explain the differences. Do that before combining amounts into a single earnings bridge.
Check whether starting earnings include interest, income taxes, depreciation, amortization, and owner pay. Reverse only what is included. If the starting line is already before interest, adding interest again overstates the result. Keep the source accounts beside the calculation so another reader can check what entered each step.
The IRS's recordkeeping guidance in Publication 583 supports keeping evidence of receipts and expenses. It does not decide which adjustments a buyer or lender must accept. Use records to show that an amount occurred and entered the selected period. Then review the reason for changing its treatment.
How can a one-owner bridge be shown clearly?
These figures are hypothetical. Assume each amount is in starting net income unless stated otherwise. The example shows a one-owner calculation, not a plumbing benchmark, tax conclusion, or lender-accepted measure. A real bridge needs records for the actual amounts and a reason for each adjustment.
Assume reported net income is $80,000. Recorded interest is $12,000, income taxes are $8,000, and depreciation and amortization total $20,000. Adding those included items produces an illustrated EBITDA base of $120,000.
The selected owner's included pay and benefits are $90,000. Assume a supported one-time expense of $6,000 and nonrecurring income of $4,000 that must be removed. Another working owner receives $40,000. For this scenario, keeping that person's duties costs $60,000, requiring an extra $20,000 in the earnings bridge.
| Hypothetical bridge item | Adjustment | Running result |
|---|---|---|
| Reported net income | Starting figure | $80,000 |
| Included interest | Add $12,000 | $92,000 |
| Included income taxes | Add $8,000 | $100,000 |
| Included depreciation and amortization | Add $20,000 | $120,000 |
| Selected owner's included compensation and benefits | Add $90,000 | $210,000 |
| Supported one-time expense | Add $6,000 | $216,000 |
| Nonrecurring income | Subtract $4,000 | $212,000 |
| Other owner's assumed continuing cost above recorded pay | Subtract $20,000 | $192,000 |
The result is $192,000 under these assumptions. Downward adjustments matter as much as additions. The bridge removes nonrecurring income and includes the extra cost of work that must continue. Show both so the result is more than a list of seller-proposed expense reversals.
Every real input needs support. The assumed replacement cost is not a researched salary or proof that one employee covers the other owner's duties. The result does not establish value or spendable cash.
How should compensation and other-owner duties be reviewed?
Find the pay components already in expenses. Salary, benefits, and employer costs can appear in different accounts. Trace the selected owner's proposed reversal to each entry. Check that salary is not counted once as pay and again in another adjustment. Keep the account trail with the bridge.
The IRS's Publication 15 for 2026 covers federal employer tax duties and compensation records. It does not supply a market replacement salary or make every owner expense discretionary. Payroll evidence helps show recorded pay. The future staffing estimate needs its own duties, assumptions, and cost support.
List other owners' work and planned roles after closing. Necessary duties still need a cost treatment if past pay was low, irregular, or recorded another way. Show both the expense already included and any extra cost under the plan. The one-owner convention does not erase everyone else's work.
Separate distributions from expenses. Check how the entity records each payment before using it in the bridge. Money paid to an owner is not always an expense in net income. If it was not included in that starting line, it cannot simply be reversed from it as owner pay.
Ask which family or related-party duties must continue and on what terms. Show who can do the work and its cost. A family relationship does not prove the expense ends after closing.
What changes when the buyer needs a managed operation?
Keep the owner-operated measure, then show a separate staffing comparison. Which duties will the buyer perform? Which can existing employees cover? Which need new resources? Check credentials and supervision apart from management titles. A person able to manage staff may not hold the required legal authority for the business.
Start with the hypothetical $192,000 owner-operated result above. Now suppose the buyer needs an extra $100,000 of fully loaded cost to replace the selected owner's required work. With the other inputs unchanged, the managed planning result is $92,000. Show the staffing change rather than silently renaming the original SDE.
This remains an illustrative planning comparison. It is not automatically adjusted EBITDA under every definition, lender cash flow, or profit after debt service. The $100,000 is not a local pay benchmark. It also does not prove one person can do the full set of duties or hold the necessary credentials.
Support the plan with job duties, current roles, recruiting evidence, and credential arrangements. Hours alone can miss rare but essential responsibilities. Keep those functions visible when assessing replacement costs.
The quality of earnings guide develops broader testing. Show the owner-operated and managed assumptions before comparing earnings or applying a price calculation.
Why is lender acceptance a separate conclusion?
A lender evaluates the proposed transaction under its own applicable requirements and underwriting process. The current SBA SOP 50 10 8.1 technical policy updates, effective October 1, 2026, contain relevant normalized-earnings and quality-of-earnings requirements for covered transactions.
Seller SDE does not itself satisfy lender review or decide debt-service cash. Label proposed, buyer-reviewed, accountant-reviewed, and lender-confirmed figures separately. Describe actual work rather than implying verification or financing approval.
Use the following sequence to prepare a reviewable bridge:
- Identify the starting earnings line, period, and accounting basis.
- Confirm which financing, tax, noncash, and compensation amounts are already included.
- Select one working owner and document the actual compensation being reversed.
- Record supported positive and negative adjustments with evidence and recurrence explanations.
- Preserve the cost of other owners' continuing duties and show the buyer's replacement plan separately.
- Reconcile the result to the proposed cash model and obtain the necessary financing review.
How do sellers use SDE, and which mistakes matter?
A seller can present the one-owner bridge with payroll records and a clear duties list. This helps a buyer test the historical measure and build a staffing plan. Keep disputed items labeled. The lender then reviews repayment under the actual financing requirements rather than accepting the acronym as approval.
Common mistakes include reversing distributions as expenses, removing all owners' pay, and using the same SDE as managed cash flow. Start with one selected working owner. Preserve other necessary work and keep the buyer's replacement plan separate from the historical earnings measure.