Seller’s discretionary earnings is a way of describing economic benefit to a working owner under stated assumptions. It is not a bank balance, a promise of future cash, or the amount a manager-run buyer automatically takes home. The worksheet keeps the accounting starting point, adjustments and operating plan separate.
Choose the starting profit before adding anything
Record the accounting period and whether the starting figure is before or after income taxes, on a cash or accrual basis, and before or after interest, depreciation and owner payroll. Reconcile it to the actual P&L and tax return. An expense can be added back only if it was included in that starting figure and the adjustment is appropriate to the intended comparison.
Do not add principal repayments to profit as an expense adjustment: principal is a financing cash flow, not an ordinary P&L expense. Do not add the same owner benefit once through payroll and again through a separate discretionary-expense line. Use a unique description and document reference for each proposed adjustment.
Separate accepted, claimed and recurring items
| Item | Questions before accepting it |
|---|---|
| Working-owner compensation | Which owner performs which tasks? Was the amount deducted? What tasks must the buyer replace? |
| Personal expense | Can the business operate without it? Is the personal component documented and lawful to exclude? |
| One-time expense | What event created it? Is the underlying cost likely to recur under another description? |
| Related-party rent or payroll | What arm’s-length recurring cost should replace the recorded amount? |
| Deferred repair or unrecorded cost | Will the buyer have to spend it? Is it an annual expense, upfront project or future capital reserve? |
| Unverified claimed item | Keep it outside the accepted case until the evidence and rationale support it. |
Some adjustments increase earnings and others reduce them. In this worksheet, use positive amounts for documented expenses appropriately added back and negative amounts for missing recurring costs or other reductions. The earlier “minus one-time expense” wording is incorrect when describing an accepted expense add-back.
A fictional example with explicit signs
| Bridge item | Annual amount |
|---|---|
| Starting pre-tax profit | $120,000 |
| Add one working owner’s compensation already deducted | +$80,000 |
| Add interest already deducted | +$25,000 |
| Add depreciation/amortization already deducted | +$30,000 |
| Add supported nonrecurring expense | +$10,000 |
| Deduct recurring cost missing from the accounts | −$15,000 |
| Adjusted owner benefit | $250,000 |
| Deduct replacement labor for a managed case | −$70,000 |
| Managed earnings proxy | $180,000 |
| Deduct capital reserve | −$20,000 |
| Cash before debt and further working-capital needs | $160,000 |
Removing the $10,000 claimed adjustment reduces accepted owner benefit to $240,000. It does not change the underlying reported profit. This separation lets a buyer see exactly how a disputed assumption changes the outcome. The numbers are fictional and do not describe an actual wash.
Owner work is an economic input
A single owner may manage staff, maintain equipment, handle bookkeeping, market memberships and cover shifts. Hiring one manager does not necessarily replace every task. List the weekly work, identify which tasks you will perform, and obtain realistic compensation and employer-cost inputs for the rest. The managed figure is labeled a proxy rather than EBITDA because an accounting classification cannot be established by subtracting one salary.
For multiple owners or family employees, rebuild the required roster. Adding every owner’s salary without replacing necessary labor overstates the benefit available to a new operator. Use current regional wages where relevant and actual job requirements for skilled or management roles. New York State: New York State minimum wage
Occupancy and capital spending need separate treatment
If the seller owns the real estate, decide whether earnings include a market occupancy charge. Comparing rent-free owner earnings with a leased business can distort both the multiple and the property calculation. If property and business are valued separately, reconcile the occupancy assumptions to prevent counting the same economic benefit twice.
Depreciation is noncash in the period, but equipment eventually requires cash. Ordinary maintenance already recorded in expenses, a closing-date repair project and a future replacement reserve are separate items. An adjustment should not make those needs disappear.
Use evidence that can be reviewed
- Reconcile the starting profit to the same period in the financial statements and tax records.
- Record each proposed adjustment with amount, sign, reason and evidence.
- Identify which expenses or work continue under the buyer.
- Keep unsupported claims in a separate scenario.
- Feed the accepted operating case into the acquisition cash-flow calculator.
Download the earnings evidence register (CSV)
The worksheet performs arithmetic; it cannot authenticate invoices, establish accounting treatment or verify whether a cost is genuinely nonrecurring. An accountant or qualified reviewer should examine the bridge and the intended use before it supports a price, credit decision or tax position.
Reproduce the fictional monthly revenue case
Reproduce the fictional monthly revenue case with explicit source periods, evidence references and unresolved questions.
Reconcile mixed-service earnings
Reconcile mixed-service earnings with a fictional worked case, explicit assumptions and a usable evidence worksheet.
Price owner replacement work and review coverage
Price owner replacement work and review coverage with a fictional worked case, explicit assumptions and a usable evidence worksheet.
Compare monthly and trailing earnings
Compare monthly and trailing earnings with the method, private tool and reproducible fictional case. Reconcile periods and amounts before carrying a result into another model.
Connect the next evidence question
Comparable evidence and sensitivity. Each workbook has its own scope, written method and fictional case. Reconcile definitions before manually carrying a result into another review.
Resolve the next evidence gap
Payroll reconciliation. Use the same reporting scope when carrying a result into another review; the tools do not transfer entries.
Sources and scope
Official and original sources checked October 17, 2026. These sources support the identified rules and methods; they do not verify a particular business or property.
- New York State — New York State minimum wageGeneral 2026 wage rates by region; check applicable industry and employment rules.
Continue your review
Verify the revenue · Normalize earnings · Model the cash flow