Key Takeaways
- Tie the starting figure to filed returns or reconciled financial statements.
- Document every adjustment instead of presenting one unexplained total.
- Include replacement labor when the owner performs necessary work.
Why it matters in a child care sale
Smaller owner-operated centers are often discussed using SDE because the owner may fill a director, administrator, or finance role. That makes labor normalization essential: removing owner pay without adding a market replacement salary can overstate transferable cash flow. Enrollment, tuition collection, staffing ratios, rent, and deferred maintenance still affect risk and value.
SDE is not a tax-return line and is not whatever a seller wants to add back. Start with traceable financial statements, then identify each proposed adjustment, its amount, source document, business purpose, recurrence, and replacement cost. A buyer may accept, reduce, or reject an adjustment after diligence.
Example
Illustrative transaction example: The owner manages daily operations and the books include owner compensation plus a personal expense. The recast schedule begins with reported earnings, identifies each item separately, and includes the expected cost of replacing the owner’s operational duties. The illustration shows method, not an approved adjustment or valuation result.
Related terms
- EBITDA — review the connected definition before finalizing structure or economics.
- Add-back — review the connected definition before finalizing structure or economics.
- Valuation multiple — review the connected definition before finalizing structure or economics.
The broader child care center valuation framework helps place this term in context. Sellers can review sale preparation, buyers can review acquisition preparation, and both sides can see the transaction process.
Frequently asked questions
Is SDE the same as the owner's salary?
No. Owner compensation can be one component of a properly constructed SDE calculation, but SDE begins with business earnings and applies defined, supportable adjustments.
Can two buyers calculate different SDE?
Yes. Buyers can reach different conclusions about recurrence, business necessity, replacement labor, or documentation, which is why an itemized bridge matters.
Should rent be added back to SDE?
Not automatically. Occupancy is necessary. Related-party or nonmarket rent may require normalization, while a buyer still needs a supportable ongoing facility cost.
Does higher SDE guarantee a higher price?
No. Value also depends on transferability, risk, growth expectations, facility terms, licensing, financing, and the multiple a buyer can support.