Free cash flow to owner is the cash a business could actually pay out to a single owner-operator once every dollar spent to keep the business running has been covered — the practical, spend-it-or-not number seller’s discretionary earnings is built to approximate.
For a Canadian small or lower-mid-market business, “free cash flow to owner” is the practical question seller’s discretionary earnings is built to answer: what could this business actually pay a single full-time owner-operator, once the accounting profit is put back on a cash basis? Deavo.ai’s definition of SDE describes exactly that recast — it “starts from a business’s pre-tax profit and adds back interest, one owner’s compensation and benefits, and discretionary or non-recurring expenses the current owner ran through the business” to show “total cash flow available to a single owner-operator who works full time” (source).
That is a deliberately different assumption from EBITDA, which “does not add back owner compensation in the same way, on the assumption that the business already pays, or would need to pay, a market wage to whoever runs it” (same source). Neither figure, as commonly quoted in Canadian small-deal pricing, nets out ongoing maintenance capital expenditure the buyer will actually have to spend to keep the business running — a sponsor underwriting off a quoted SDE or EBITDA multiple should ask what capex assumption, if any, sits behind it.
A target shows pre-tax profit of $310,000. Add back interest of $18,000, owner salary and benefits of $140,000, and a one-time lawsuit settlement of $35,000: SDE, or free cash flow to owner on the seller’s framing, comes to $503,000. If the roof and delivery fleet realistically need $60,000 a year of maintenance capex that the SDE figure never subtracted, the cash actually available to a new owner is closer to $443,000 — the number the fund’s underwriting should price, not the $503,000 on the teaser.
See also: Seller’s discretionary earnings (SDE) · Maintenance capital expenditure · EBITDA.
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