The short version
- Buyers price the profit they can prove, not your sales total
- SDE adds the owner's pay, insurance and perks back to net profit
- EBITDA is used once a manager replaces the owner and gets a market salary
- One time income and owner draws are not operating cash flow
Start With Cash Flow, Not Sales
Revenue is not what sets price. A company with seven or eight million in sales might sell for about two million if margins are thin. The question buyers ask is how much money the business makes and for how many years they will get it back.
What Owner Benefit Means
Owner benefit, or SDE, is the money one working owner could take out of the company.
Start with net profit and add back the owner's salary, health insurance, vehicle and personal costs that run through the books. The result is what a single buyer who works full time can expect to earn.
Brokers use SDE for Main Street companies, usually those priced up to around two million dollars.
When EBITDA Takes Over
Bigger companies often have managers, so the owner is no longer needed day to day. Then the buyer pays a market salary for that role, and the profit left is EBITDA.
Private equity style buyers usually look for a million dollars or more in EBITDA, and they pay lower multiples than headlines suggest.
Add Backs That Hold Up
- Owner pay and the benefits that go with it
- Personal costs that have nothing to do with operations
- One time expenses with a paper trail
- Depreciation, though buyers may keep part of it as upkeep on equipment
An add back must be real and documented. Extra money that happened to show up is not one.
Mistakes That Cost Trust
Do not count a bank loan or the sale of a truck as income. Do not treat owner draws as profit, since they never touch the profit and loss statement. Buyers catch both in diligence, and one catch makes them question everything else.
Cash that never reached the books counts for nothing. Saving roughly twenty percent in tax can cost two to three times that in price at a typical multiple.
What Multiples Look Like
Smaller companies commonly sell for one to three times owner benefit, and many trade around two to three times. Waiting a year rarely brings a better multiple, because multiples are fairly steady over time.
Next Steps
Ask your CPA to line up three years of recast numbers. See how buyers pay, the contracting page for a worked example of buyer questions, and request a valuation.