SDE or EBITDA Depends on Who Runs the Company
Two earnings measures do most of the work in a sale. Which one applies to you depends on size and on how much of the daily work you still do.
Seller's discretionary earnings, or SDE, is what one working owner could take out of the business. It counts your salary, health insurance and perks. Smaller companies, up to about $2M in price, are usually priced on SDE.
EBITDA assumes a paid manager already runs the place at a market salary. It is the measure for larger companies, where the owner has stepped back and private equity or strategic buyers are at the table.
Use the wrong one and the number is off from the start. A $6M company with a hired general manager should not be valued as if you could pocket that manager's pay.
Recasting Turns Your Tax Return Into a Buyer's Number
Your tax return was built to lower taxes. A buyer wants to know what the business really earns. Recasting is the bridge between those two views.
The broker starts with three years of statements and adds back items that won't continue under a new owner. Common add-backs include:
- Your own salary and benefits, when the measure is SDE
- Interest, depreciation and amortization
- One time costs, such as a lawsuit settlement or a remodel
- Personal expenses run through the company, if you can document them
Add-backs have to survive diligence. Proceeds from selling a truck, a loan deposit or cash you never reported do not count. Owner draws are not cash flow either until they are properly recast.
You get paid for the profit you can prove, not the profit you remember.
The Multiple Rewards Profit That Will Transfer
Once earnings are set, the multiple decides the price. It reflects how confident a buyer is that the cash flow will continue after you leave.
It tends to rise with a management team that runs things without you, recurring revenue that is hard to cancel, a long track record and a diversified customer base. Clean, tax reported profit helps too.
It falls with customer concentration, revenue tied to you personally, a short or month to month lease, and declining sales during the year you go to market. In San Francisco, a lease with little term left can cap the price on its own.
Waiting a year rarely fixes a low multiple. Multiples are fairly stable. Improving the business is what changes the result, which is why our guide to selling in San Francisco starts with preparation.
Why Did an Online Calculator Give You a Different Number?
A calculator takes revenue, a profit figure and an industry, then applies an average multiple. It can't read your lease, your customer list or your books.
It also can't tell a legitimate add-back from a hopeful one. Two companies with the same revenue can sell for very different prices because one has better margins, a longer lease or less owner dependence.
Sector matters too. A software company with strong retention trades on different terms than a restaurant with a liquor license and a short lease.
What the Free Estimate Covers and Leaves Out
When you request an estimate, a broker from our partner reviews your revenue, profit and recent statements. Expect questions about add-backs, staff, customers and the lease.
You get a value range, the earnings measure it rests on and the main things pushing it up or down. You also hear which buyers are likely to be interested and how they would pay.
It is not a tax opinion and not a legal review. It does not replace a quality of earnings report, which a larger buyer may commission during diligence.
A Broker Opinion of Value Is Not a Formal Appraisal
A broker opinion of value is a market view. It asks what buyers are paying right now for companies like yours, and how yours compares.
A formal appraisal is a different product. Certified appraisers prepare one for an estate, a divorce, a partner buyout or a lender, and it takes longer and costs money.
If you are planning a sale, start with the broker's view, since buyers set the price. A buyer's lender may order its own appraisal later. Read more about how the referral works and who pays.
To see where your company lands, fill in the estimate form or call (415) 555-0163. The conversation is confidential and costs you nothing.