Convenience stores require careful attention to a few specific SDE adjustments. The combination of family labor, variable owner compensation, and mixed revenue streams (retail plus lottery) can trip up valuations if not handled correctly.
In this guide, we'll work through a real-world case study showing how to properly normalize earnings for a family-run convenience store.
The Case Study: Parkside Market
Parkside Market is a family-run independent convenience store that's been operating for 14 years in the same location. The business is a true family affair: husband and wife own and operate the store, and their two adult children work part-time shifts.
The revenue mix breaks down as:
- Retail sales: 72% of revenue (snacks, beverages, tobacco, sundries)
- Lottery sales: 27% of revenue
- Lottery commissions: ~1% of revenue
An important distinction: lottery "revenue" on the books includes the full value of tickets sold, but the store only keeps the commission (typically 5-6% of lottery sales). So while 27% of register activity is lottery, the actual earnings from lottery represent roughly 1% of total revenue.
The store operates in leased space with 3 years remaining on the lease plus a 5-year renewal option—a favorable situation that provides stability for a buyer.
There's no liquor license and no gas pumps. This is a straightforward neighborhood convenience store, the kind you'd find in any suburban area.
Here's the challenge: the entire family is leaving. Any buyer will need to replace two owner-operators and two part-time employees. This makes labor normalization critical.
The Financials: Four Years of Revenue and Profit
Let's look at the numbers:
| Item | Year 1 (Current) | Year 2 | Year 3 | Year 4 |
|---|---|---|---|---|
| Revenue | $1,300,000 | $1,310,000 | $1,400,000 | $1,390,000 |
| Operating Expenses | ||||
| Owner Salaries (Both Owners) | $135,000 | $120,000 | $100,000 | $150,000 |
| Wages (Children) | $68,000 | $63,000 | $59,000 | $54,000 |
| Rent | $26,000 | $26,000 | $26,000 | $26,000 |
| Cost of Goods Sold | $897,000 | $904,900 | $966,000 | $959,100 |
| Vehicle Expense (Personal Use) | $15,000 | $15,000 | $15,000 | $15,000 |
| Meals & Entertainment | $3,500 | $3,500 | $3,500 | $3,500 |
| Amortization | $5,000 | $5,000 | $5,000 | $5,000 |
| Interest on Debt | $2,500 | $2,500 | $2,500 | $2,500 |
| Other Operating Expenses | $123,000 | $130,100 | $173,000 | $114,900 |
| Net Income | $25,000 | $40,000 | $50,000 | $60,000 |
Two things jump out immediately:
Revenue is declining. The store went from $1.4M to $1.3M over four years—a 7% decline. This isn't catastrophic, but it's a trend buyers will notice.
Net income is also declining. From $60,000 to $25,000. Combined with the revenue decline, this paints a picture of a business that's losing momentum.
But wait—there's more to this story than the surface numbers suggest.
The Owner Salary Wild Card
Look at the owner salary line: $135,000, $120,000, $100,000, $150,000. That's a $50,000 swing year to year.
In a family business, owner compensation often fluctuates based on factors that have nothing to do with business performance—a kid's wedding, a home renovation, tax planning strategies, or simply taking more during good years and less during tight ones.
This is exactly why we calculate SDE. Net income alone doesn't tell us what the business actually earns for its owner.
SDE = Net Income + Owner Compensation + Discretionary Expenses
When we add back owner salaries, the picture changes dramatically. Year 4 (with $150,000 owner salary) will show the highest SDE despite being four years old. Year 3 (with only $100,000 owner salary) will show lower SDE even though net income was higher.
This is the normalization working as intended—it strips out the owner's compensation decisions to reveal true business earnings.
The Family Labor Adjustment
Here's where convenience store valuations get tricky.
The two children currently work in the business and are paid $68,000 combined (Year 1). But they're leaving with the parents. A buyer will need to hire replacement staff.
What would it cost to hire equivalent part-time help on the open market? Based on local wages, approximately $45,000 for two to three part-time employees providing similar coverage.
This creates an add-back:
Family Labor Add-Back = Children's Current Wages − Market Rate for Replacement Staff
For Year 1: $68,000 − $45,000 = $23,000 add-back
Why is this an add-back rather than a reduction? Because the children were being paid more than market rate. The business was essentially paying a family premium. A buyer hiring at market rates will have $23,000 more in available earnings.
Note: This works both ways. If family members are paid below market rate (common with unpaid spouses doing bookkeeping), you'd reduce SDE to account for the labor cost a buyer would incur.
The labor add-back changes each year as the children's wages increased:
- Year 1: $68,000 − $45,000 = $23,000 add-back
- Year 2: $63,000 − $45,000 = $18,000 add-back
- Year 3: $59,000 − $45,000 = $14,000 add-back
- Year 4: $54,000 − $45,000 = $9,000 add-back
Standard Discretionary Add-Backs
Beyond owner compensation and family labor, we add back the usual discretionary expenses:
Vehicle Expense ($15,000): The owners run personal vehicles through the business. A buyer may or may not do the same—this is discretionary.
Meals & Entertainment ($3,500): Personal meals and entertainment run through the business.
Amortization ($5,000): A non-cash expense that gets added back.
Interest on Debt ($2,500): Financing is a choice. A buyer may pay cash or finance differently. Interest gets added back to show earnings before debt service.
Calculating the Normalized SDE
Let's put it together for Year 1 (most recent):
| Net Income | $25,000 |
| Add-Backs | |
| + Owner Salaries | $135,000 |
| + Family Labor Adjustment | $23,000 |
| + Vehicle Expense | $15,000 |
| + Meals & Entertainment | $3,500 |
| + Amortization | $5,000 |
| + Interest on Debt | $2,500 |
| Seller's Discretionary Earnings | $209,000 |
Here's the SDE across all four years:
| Year | Net Income | Owner Salary | Other Add-Backs | SDE |
|---|---|---|---|---|
| Year 1 (Current) | $25,000 | $135,000 | $49,000 | $209,000 |
| Year 2 | $40,000 | $120,000 | $44,000 | $204,000 |
| Year 3 | $50,000 | $100,000 | $40,000 | $190,000 |
| Year 4 | $60,000 | $150,000 | $35,000 | $245,000 |
What These Numbers Tell Us
Several important observations emerge from this analysis:
Year 4 has the highest SDE despite being the oldest year. This is entirely due to the owners taking $150,000 in salary that year versus $100,000-$135,000 in other years. The SDE calculation correctly normalizes for this—but it also means a simple average would be skewed by a compensation decision made four years ago.
The declining trend is real but modest. Setting aside Year 4 (which is an outlier due to owner compensation), Years 1-3 show SDEs of $209,000, $204,000, and $190,000. That's roughly flat when you account for the labor adjustment changes.
This is a stable business, not a declining one. The revenue decline from $1.4M to $1.3M looks concerning at first glance, but the SDE tells a different story. The owners have maintained consistent earnings while choosing to take varying levels of compensation. A growth-oriented buyer could potentially reverse the modest revenue decline with active management.
The family labor premium was significant. Paying the children above market rate reduced net income by $9,000-$23,000 depending on the year. A buyer using market-rate labor will see improved cash flow.
A Note on Lottery Revenue
With 27% of register activity coming from lottery sales, it's worth understanding how this affects the business.
The store doesn't keep all that lottery revenue—far from it. The lottery corporation takes the lion's share. The store earns a commission of roughly 5-6% on lottery sales, which translates to about 1% of total reported revenue.
So why does lottery matter? Two reasons:
- Traffic driver: Lottery customers come in regularly, and many buy retail products while checking their tickets or purchasing new ones.
- Pure margin on commissions: That 1% commission has no cost of goods sold against it—it's essentially pure profit that drops straight to the bottom line.
However, lottery also carries risk: commissions can be reduced by the provincial/state lottery corporation, and a store shouldn't be valued primarily on lottery traffic. The retail fundamentals need to stand on their own.
What Comes Next
Calculating SDE is step one. In Part 2, we'll apply industry multiples to arrive at a valuation range—and address the critical question of absentee ownership.
Since both owners are leaving, we'll calculate two scenarios: what the business is worth to a buyer who plans to work in it, and what it's worth as a passive investment requiring a hired manager.
Continue to Part 2: How to Value a Convenience Store: From SDE to Sale Price
Want to Calculate Your Store's SDE?
Our valuation tool walks you through the SDE calculation process in under 10 minutes. Enter your financials and expense adjustments—we'll calculate your weighted SDE and apply industry-specific multiples to generate your estimated value range.
Get Your Estimate