What is Seller's Discretionary Cash Flow?

Seller's Discretionary Cash Flow is a very important term you must know if you're looking at a small business to buy. Depreciation, amortization and interest paid by the business are items that are discretionary and generally "added back" to the bottom line of the business. Also, many, if not most, small business people pay lots of bills out of their businesses because they are deductible to the business but not to the individual. The owner may buy or lease a car or pay country club dues or use cell phones or many other things that are purely discretionary to the owner. A buyer may or may not choose to pay the same items. So, take the cash flow or profit off the bottom line of the profit & loss statement or tax return and add back items such as depreciation, interest paid, and the discretionary items mentioned above and you have Seller's Discretionary Cash Flow (also known as Owner's Discretionary Cash Flow), the MOST important number a small business buyer needs to know.

How to calculate Seller's Discretionary Cash Flow
Seller's Discretionary Cash Flow or SDCF is a common Cash Flow based measure of business earnings for owner-operator managed businesses. According to the International Business Brokers Association, SDCF can be determined as follows:

Start with the business pretax earnings.

• Add non-operating expenses and subtract non-operating income.
• Add unusual or one-time expenses, subtract non-recurring income.
• Add depreciation and amortization expenses.
• Add interest expense, subtract interest income.
• Add a single owner's total compensation.
• Adjust compensation of all other business owners to market value.