Home  >  Blog Posts & Articles  >  Cash Flow, SDE - Determining The Worth Of A Small Business

Cash Flow, SDE - Determining The Worth Of A Small Business


The value of the small business is mostly determined by the cash flow (or business brokers use the term "Seller's Discretionary Earnings" instead to be more accurate).  Seller's Discretionary Earnings (SDE) is defined as net income before taxes (operating income); interest; depreciation and amortization; owners compensation; owners benefits; and non recurring expenses.

Most small businesses sell for 1.5 - 3.5 (multiples) times the yearly SDE, depending upon the value factors of the business. Things that determine the multiple or value factors are the stability of historical earnings; business & industry growth; type of business (service with few assets to manufacturing with significant assets); location & facilities; stability & skill of employees; competition; diversification of products, service & geographical markets; desirability of the business; depth of management; and terms of the sale. The national average is 2.76 times SDE.

The inventory, equipment or fixtures are included in the price because they are what is required to generate the SDE. Some businesses need inventory, some need equipment (assets) and some need both, depending on the type of business.  The amount of assets is one of the criteria that helps determine the value a business.

Some value (but not too many small business brokers) the business by its  EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization. The multiple that is used is generally in the area of 4 to 6 times EBITDA.  EBITDA is mostly used by investment bankers or M&A folks, people who usually handle bigger stuff ($ 20 million+ price tag).

Business brokers count owner's compensation and owner's benefits as part of earnings or SDE (Seller's Discretionary Earnings).  You can also define SDE as EBITDA plus owner's salary plus owner's benefits.  Basically, if you take SDE times 1.5 to 3.5 multiple, you should have similar numbers if you calculate EBITDA times 4 to 6 times.

The reason business brokers don't usually go by EBITDA times 4 to 6 times is that, it's basically the owner's discretion to pay him/herself salary of whatever the amount and most owners write off a lot of personal expenses through the business (called owner's benefits).

This is one of the worst times to sell a business right now.  No bank financing is available these days so multiples are down, demand is down and a lot of buyers are cash strapped.  I tell sellers if you don't absolutely have to sell, then maybe he/she should hold off.  No one knows when the economy will turn around but it eventually will and once bank starts lending again, multiples of businesses should slowly inch up again.

Below is a list of documents that a typical business broker needs in order to package a business for sale;

1)  last three years of profit & loss statements including balance sheet

2)  last three years of tax returns

3)  copy of the lease

4)  major fixture, furniture & equipment list

These days, selling a business is a tough task.  If your business does sell, it takes an average of 3 - 6 months to find a buyer.  And after negotiating the price, seller and buyer will go through due diligence and then escrow.

There are buyers out there for good, solid businesses - perhaps even more so now, so good luck!

About The Author:  Ron Hottes is with Business Team - a business brokerage team of 28 highly skilled and seasoned professionals within Los Angeles. Our business brokers have over 100 years of cumulative experience and the expertise to help you buy or sell a business in the Los Angeles County area. Ron can be reached at 310-539-8300.


Categories: BizBen Blog Contributor, Business Valuation Issues, How To Sell A Business



Steve Erlinger Coin Laundry Broker
Midas Big O Tires Franchises Opportunities For Sale
Southern California Legal Services For Buyers And Sellers
National Academy Of Athletics Opportunities
Ryan Clark Business Brokerage Services
Chris Seaman Business Broker San Diego
Willard Michlin Due Diligence Services


Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bakeries
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Hotels/Motels
Ice Cream Shops
Juice, Smoothie Shops
Laundromats
Liquor Stores
Markets, Marts
Nightclubs
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Alameda
Alpine
Amador
Butte
Calaveras
Colusa
Contra Costa
Del Norte
El Dorado
Fresno
Glenn
Humboldt
Imperial
Inyo
Kern
Kings
Lake
Lassen
Los Angeles
Madera
Marin
Mariposa
Mendocino
Merced
Modoc
Mono
Monterey
Napa
Nevada
Orange
Placer
Plumas
Riverside
Sacramento
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz
Shasta
Sierra
Siskiyou
Solano
Sonoma
Stanislaus
Sutter
Tehama
Trinity
Tulare
Tuolumne
Ventura
Yolo
Yuba

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million



BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #290 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2014, All Rights Reserved



Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 
Search BizBen.com

Over 500+ New & Refreshed Postings Daily
Includes Both For Sale & Wanted Postings
Over 20,000 Buyer Searches Daily On BizBen
127 California Businesses Sold: 11/24-11/28
Looking For A Certain Business Type Or Location? Buyers Use Wanted Posti...
BizBen Index: Weekly Results - 127 California Businesses Sold 11/24-11/2...