Hello searcher community,
I know the technical differences between a companies earnings (EBIT et al.) and seller discretionary earnings (SDE). However, I sometimes find myself trapped in a mental loop when evaluating the company based on comparable multiples. An example: Let's say I am looking at a company which earns $250k in (non-adjusted) EBIT which includes the owner's CEO salary of $500k as cost, so the SDE is $750k. If the comparable multiple for this company would be 4x I would land at $3m EV with the SDE but only $1m EV with the EBIT. Pretty vast range... Could it be an approach to "normalize" the CEO salary to a competitive market rate, say $250k instead of $500k and then work with this as an adjusted EBIT x4 = $2M valuation? Also, does it matter if the owner only works 20h/week in the business, would you only factor in half an executive's salary? My idea definitely is to find a company which I could serve as a full time leader but certainly I do not want to buy myself a job and pay a multiple on my future salary in the company if a replacement's salary would usually be adjusted for. Would love to hear your philosophies on this question.