As you begin preparing for your retirement from the dentistry, you have a lot to consider, including what to do with your practice.If you’re planning on selling your practice prior to retirement, you’ll need to have several key pieces of information about your business, including seller’s discretionary earnings (SDE).
Below, we’re going to discuss seller’s discretionary earnings and why it’s an important metric to know when preparing to sell your dental practice.
What Is Seller’s Discretionary Earnings?
Seller's discretionary earnings, or SDE, is a metric used to understand what funds are left in a business once all necessary payments have been made.
Essentially, SDE is the available funds after all expenses have been paid. For example, once the owner has paid rent, payroll to staff, and procedure supplies, the SDE is the amount left in the bank account that they could use to pay themselves.
Seller’s discretionary earnings is:
- Generally used to evaluate smaller businesses that are selling for less than $2 million.
- Often only calculated when a dentist is selling to another practitioner. For example, they are not typically used during sales to dental support organizations (DSOs).
- Often calculated annually or during the trailing twelve month (TTM) period before the dental practice is listed for sale.
In this case, SDE allows potential buyers to understand the amount they could make if they purchase your dental practice.
While similar, SDE is not the same as cash flow or earnings before interest, taxes, depreciation, and amortization (EBITDA).
As an equation, SDE = earnings before interest, taxes, depreciation, and amortization (EBITDA) + add backs + owner’s compensation.
Why Does Seller’s Discretionary Earnings Exist?
In small businesses, like privately owned dental practices, owners can compensate themselves in different ways depending on the set up of their entity. Two common methods are either distribution from available funds, directly out of the bank account, or a set salary, typically on payroll along with the other employees. A combination of both is also an option.
In order for a potential buyer to understand how one dental practice stacks up against another, they can add the owner’s compensation back into net income to understand the profitability of the dental practice and how it could impact their wealth management.
Why IS SDE Important?
This figure is important because the valuation of the business is often based on the given SDE. This metric helps potential buyers answer questions, such as:
- Does this provide me with a high enough salary for my needs?
- Is this a comparable purchase, based on other practices for sale in the area?
- What multiple of my SDE can I get for my practice if I were to sell?
Essentially, SDE is vital to helping buyers understand the true value of the dental practice and how much income they could potentially take home.
It’s Never Too Soon To Begin Preparing for a Successful Transition
While considering and calculating the seller’s discretionary earnings for your business is crucial, it’s not the only aspect to consider when you’re ready to sell your practice. You may also need to consider:
- Estate Planning Strategies
- Business Succession Planning
- Buy/Sell Agreements
No matter where you are in your plan to sell your dental practice, speaking with an advisor is a the best way to ensure a successful transition into retirement or your next career move. Contact us today to get started!
About the Author
This blog was written by the team at Practice Real Estate Group, a full-service real estate firm focused on healthcare providers.
About Treloar & Heisel
Treloar & Heisel, an EPIC company, offers dental and medical professionals a comprehensive suite of financial products and services ranging from business and personal insurance to wealth management. We are proud to assist thousands of clients from residency to practice and through retirement. Our experienced teams deliver custom-tailored advice through an active local presence, while our strong national network ensures that clients experience the same high level of service throughout the country.