Pay Attention to Seller’s Discretionary Earnings to Maximize Business Valuation!
If you are a small to medium sized business owner, when it comes to selling your business one of the most important metrics that you should be aware of is known as Seller’s Discretionary Earnings or SDE. SDE refers to the total benefits that an owner receives from owning a business. SDE is important because it is one of the metrics that is used to help establish the value of a business for sale. (in larger companies EBITDA is typically used for valuation).
One of the main ways that a business owner can jeopardize the valuation of their business is by running too many non business-related expenses through the business. While this does reduce taxable profit while the owner is operating the business, it can cause a bank to undervalue the business which could affect a buyer’s ability to finance the purchase.
In addition to a potentially lower valuation, buyers will also wonder if the business is being operated effectively and that could also lead to lower purchase offer valuations.
SDE is based upon Net Income before taxes, Depreciation, Amortization, Interest, one Owner’s Compensation and Other Additions/Deletions which reflect how much salary a Buyer can take plus Tax Capability and Business Debt Carrying Capacity; A higher SDE will normally equate to a higher value or selling price.
If you are considering selling your business in the next 1-4 years you should start thinking about your SDE now so that you can maximize the valuation when it comes time to sell your business.
If you would like to discuss SDE or the sale of your business, please contact me at firstname.lastname@example.org for a complimentary consultation.