+Pre-tax Net Income
+ Owner Salary
+ Interest
+ Depreciation and Amortization
+ Personal Expenses
- Replacement Salary of Additional Owners Leaving (if multiple)
 - Adjusted Rent (if not paying market rental rate)
SDE or Adjusted EBITDA

Further explanation:

A seller’s discretionary earnings are the pretax and pre-interest profits before non-cash expenses, one owner’s benefits, one time investments, and any non-related income or expenses.  It is essentially what a new owner can reasonably expect for annual net earnings. 

Let’s break this down into each of its parts:

• Pretax and pre-interest profits before non-cash expenses. This is EBITDA, the accounting terminology for earnings before interest, depreciation, taxes, and amortization.
• One owner’s benefit. Standard in the calculation of SDE is the “add-back” of one owner’s compensation. If there are multiple owners who actively participate in the operation of the business, part of the calculation of SDE requires that a projection be done to replace the other owner’s efforts and work.
• One-time expenses. This would include major website redesigns, acquisition of specific licenses, one time application fees, etc.
• Non-related business expenses or income. Common scenarios would be taking extra time on a business trip for a personal vacation, running an automobile expense through your business when your business does not require an automobile, etc.
• Adjusted expenses. Consider a company that owns a large fulfillment center and a small website they operate out of that same fulfillment center. Any company acquiring this small website will need to account for the expense of warehousing and filling orders. This expense will need to be injected into the overall earnings statement of the business.