If you’ve ever tried to figure out what your preschool business is worth, you might have looked at your tax return and thought, “This profit number seems low — surely my school is worth more than that.” You’re probably right. And that’s because buyers don’t use the number on your tax return to determine value — they use normalized earnings. Specifically, they look at two key profit metrics: SDE (Seller’s Discretionary Earnings) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Why Earnings Matter More Than Revenue
Revenue tells buyers how much money your business brings in. Earnings tell them how much money it keeps. And when it comes to valuation, that’s what really matters. Buyers want to know the true earning power of your preschool — not the version shaped by tax strategies, owner perks, or one-time expenses. They’re looking for a clear picture of profitability under new ownership.
SDE vs. EBITDA: Plain-English Definitions
Seller’s Discretionary Earnings (SDE)
SDE is the most common metric used for small to mid-sized childcare businesses. It represents the total profit of the business plus the owner’s salary, perks, and discretionary expenses added back in. Essentially, it’s how much money the business generates for you as the owner.
EBITDA
EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — is more common in larger, investor-driven acquisitions. It strips out certain financial decisions to show the operating profit of the business without factoring in how you pay yourself or structure your finances.
Think of both as ways to answer the same question: How much profit does this business really produce, regardless of who owns it?
Add-Backs: The Secret to Showing True Profit
A crucial part of calculating earnings is identifying add-backs — expenses that won’t continue once a new owner takes over. Examples include:
- Owner salary and benefits above market rate
- Personal vehicle or phone expenses
- One-time legal or consulting fees
- Non-essential travel or meals
The key is documentation. Every add-back you claim should be easy to explain and verify. Overstating add-backs — or failing to prove them — can damage your credibility and lower your valuation.
Why Earnings Drive Valuation
Here’s the formula most buyers use:
Business Value = Earnings × Industry Multiple
That means higher earnings = higher valuation. Clean, documented add-backs = stronger buyer confidence. Transparent reporting = fewer negotiations and faster deals. Put simply, buyers don’t apply a multiple to revenue — they apply it to SDE or EBITDA.
Common Mistakes That Hurt Valuation
Many sellers accidentally leave money on the table by making these avoidable mistakes:
- Confusing revenue with profit
- Overstating add-backs without documentation
- Leaving personal expenses mixed into the books
- Failing to prepare a normalized earnings statement before listing
How to Calculate Your Earnings
- Review your P&Ls for the last 2–3 years.
- Identify all legitimate add-backs and document them clearly.
- Separate personal from business expenses and clean up your books.
- Work with a CPA who understands childcare businesses to prepare a normalized earnings statement.
- Use that number — not your tax return — as the foundation for your valuation.
The number on your tax return isn’t your business’s true profit — and it’s definitely not the number buyers care about. By understanding how earnings are calculated and normalizing your financials, you’ll strengthen your valuation, build buyer confidence, and maximize your return when it’s time to sell.
Ready to explore what a protected, profitable preschool sale looks like? Visit chelseareue.com to learn more and connect with a childcare-focused agent who can guide you through every step.
Real Numbers: What Add-Backs Do to Your Sale Price
This is the math that most sellers haven’t done — and it’s the most important calculation in understanding your valuation.
Preschool businesses in Texas typically sell at 2.5x–3.5x SDE. At those multiples, every $10,000 in documented SDE translates to $25,000–$35,000 in sale price. Here are three scenarios for a school with different levels of add-back documentation:
- Minimal documentation: Net income of $95,000, owner never separated add-backs from business expenses. SDE appears to be $95,000. At 3x: $285,000 sale price.
- Partial documentation: Owner salary of $110,000 added back, plus $12,000 vehicle. Documented SDE: $217,000. At 3x: $651,000 sale price.
- Full documentation: Owner salary $110,000, vehicle $12,000, health insurance $18,000, depreciation $22,000, one-time legal fee $7,500. Documented SDE: $264,500. At 3x: $793,500 sale price.
The difference between minimal and full documentation in this example: $508,500 in sale price. The documentation itself doesn’t cost anything — the add-backs were always there. The only variable is whether they were identified and documented properly.
This is why working with a childcare-specialized agent who understands add-back analysis and SDE normalization is not optional. It’s the difference between selling your school at what the tax return says it’s worth — and selling it at what it’s actually worth.
