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.
How to evaluate SDE vs. EBIT for a target's valuation?
by a searcher from University of Applied Sciences
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This, from one of my publications:
• One of the biggest contributors to a dumb deal occurs when naïve buyers erroneously adjust, recast and normalize the financial statements of a company for sale.
• In our example of a dumb deal, the six-figure annual net profit the seller touts is really a five-figure net loss for the unsuspecting buyer. The adjustments, by the seller and the seller’s representatives, shown to potential buyers seem plausible (but not to people with sufficient experience achieving successful acquisitions).
• Sellers are delighted by eager, uninformed competition among buyers.