February 28, 2024
All About Seller’s Discretionary Earnings (SDE)
Let’s dive into a topic that’s both pivotal and perhaps a tad enigmatic for many: seller’s discretionary earnings (SDE). In this guest blog, PTS CPA Jennifer Sims sheds light on this metric that significantly impacts the buying and selling process of dental practices.
Understanding SDE: What Does It Mean for Sellers?
When it comes to selling your dental practice, understanding seller’s discretionary earnings (SDE) is paramount. But what exactly is SDE, and why does it matter? It represents the total financial benefit available to a single owner-operator, encompassing not only profits but also various perks, personal expenses paid by the practice or any utilized tax treatment advantages. As a seller, this metric provides a comprehensive picture of your practice’s profitability, allowing you to showcase its true earning potential to potential buyers.
Imagine you’re a dentist looking to sell your practice. Sure, you’ve got your revenue and expenses neatly organized, but what about those additional benefits like a company car or travel expenses? SDE considers these discretionary items, giving you a more accurate representation of your practice’s financial health. It’s like pulling back the curtain to reveal the full scope of your practice’s earning power.
Buyer’s Perspective: What Does SDE Mean for Buyers?
Let’s switch gears and put ourselves in the shoes of prospective buyers. When evaluating a potential dental practice acquisition, buyers want a clear understanding of its profitability and potential return on investment. This is where SDE comes into play. Unlike earnings before interest, taxes, depreciation and amortization (EBITDA), which is commonly used for private equity or DSO (dental service organization) acquisitions, SDE provides a tailored view of a practice’s earning potential for individual buyers.
For buyers, SDE offers insight into the true income they can expect as the new practice owner. By considering not only the traditional financial metrics but also the discretionary expenses and owner benefits, buyers can make more informed decisions and accurately assess the value of the practice.
Unlike PE-backed DSOs, individual buyers usually need bank financing for acquisitions. So, effectively presenting the SDE during the loan application process is key to getting that financing. It’s the hook that convinces lenders the practice is a solid investment and the buyer can make it profitable, making it a vital part of the whole acquisition process.
Common Queries: FAQs on SDE
At PTS, we get questions about SDE regularly, and it’s no surprise why. Understanding this metric is helpful for both sellers and buyers alike. Here are some common queries demystified:
– What expenses are included in SDE? SDE encompasses all expenses necessary to operate the practice, including the owner’s salary, net income, owner perks, tax advantages and discretionary spending.
– How does SDE differ from EBITDA? While EBITDA focuses on operational profitability, SDE provides a more tailored view for individual owner-operators, considering discretionary expenses.
– How can professional guidance influence the result? It’s essential because clean and accurate data leads to efficacious results. A seasoned dental CPA can help gather the right information, ensuring an accurate SDE. By providing expertise in navigating practice transitions, understanding valuation methods, and planning for the next career phase, professional representation helps both buyers and sellers get the best deal.
Bottom Line
Seller’s discretionary earnings (SDE) serve as a vital metric in the realm of dental practice sales. For sellers, it offers a transparent view of their practice’s earning potential, including both profits and perks. Meanwhile, for buyers, SDE provides insight into the true income they can expect post-acquisition for informed decision-making.
As the dental landscape continues to evolve, understanding and leveraging SDE will remain essential for successful practice transitions. Whether you’re considering selling your practice or embarking on a new acquisition journey, embracing SDE empowers you to navigate the process with confidence and clarity.
Contact the experts at Professional Transition Strategies to navigate the complexities of SDE and unlock the full potential for your dental practice sale or acquisition.