This guide provides general educational information—not legal, tax, accounting, financial, or investment advice. Confirm material decisions with qualified professionals.
Start with normalized earnings
Seller’s discretionary earnings generally begins with pre-tax profit and adds back one owner’s compensation, interest, depreciation and amortization, and supportable nonrecurring or discretionary expenses. EBITDA is more common when the company supports a professional management structure. Neither measure should include unsupported adjustments.
- Trace the starting profit to financial statements and tax returns.
- Require documentation for every add-back.
- Deduct the market cost of management if the buyer will not replace the owner.
Apply a multiple that reflects risk
A multiple is a shorthand for expected return, growth, and risk. Recurring revenue, diversified customers, clean records, stable employees, low owner dependence, and defensible market position can support a stronger result. Concentration, volatile earnings, deferred investment, legal exposure, and weak transferability can reduce it.
Cross-check with other methods
Compare the earnings approach with asset value, comparable transactions where reliable data exists, and a cash-flow model. Asset-heavy or distressed companies may be driven more by adjusted net assets. A forecast is only as reliable as its assumptions.
Price is not the whole deal
Working capital, inventory, assumed debt, seller notes, earnouts, real estate, transaction costs, and tax structure can materially change economics. Define what is included and model the cash required at closing separately from the headline price.
Use a downside case
Recalculate value and debt coverage if revenue falls, margins compress, a major customer leaves, or the owner must be replaced at market compensation. A purchase should not depend on a perfect first year.
Primary sources and further reading
Always confirm current requirements directly with the relevant agency, lender, or professional.