SDE — seller’s discretionary earnings — is the number most small specialty food businesses actually get valued on. It starts from net profit and adds back expenses that are seller-specific, discretionary, or one-time, to show what the business really earns for a full-time owner. Where sellers most often go wrong is treating recurring operating costs as if they qualify for the same treatment.
The test that separates a real add-back from an inflated one
The working test brokers and accountants use: if an expense would need to be reinstated to keep revenue flowing, it isn’t discretionary, and it isn’t an add-back. Software subscriptions almost always fail that test. Business email, shared documents, inventory or POS software — a buyer keeps paying for these on day one, so they stay in the earnings calculation rather than getting stripped out. A defensible add-back set has to survive a real quality-of-earnings review, not just maximize the final number.
Why that makes documentation the real leverage
Since software costs stay in the number either way, the leverage isn’t in trying to add them back — it’s in making sure they’re accurate and current. An outdated subscription still being billed, a plan sized for more seats than the business actually uses, or a rate that’s higher than what’s currently available all quietly understate real earnings. Before a sale-prep review, it’s worth checking whether the plan still matches actual usage, and whether a better rate is available: for business email and shared documents specifically, check the current Google Workspace code rather than assuming the rate paid last year is still the best one on offer.
It’s a small line item next to inventory and COGS, but SDE gets built from every line item, and a buyer’s team will notice if the software costs on the page don’t match what a quick check of current rates would show.
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